Advertising

I (and most people) have a love/hate relationship with advertising. Yes, I enjoy each new Absolut vodka print ad: Where will they hide the famous bottle? And I enjoy the humor in British ads, and the risqué quality of French ads.

Even some advertising jingles and melodies stick in my mind. But I don’t enjoy most ads. In fact, I actively ignore them. They interrupt my thought processes. Some do worse: They irritate me.

The best ads not only are creative, they sell. Creativity alone is not enough. Advertising must be more than an art form. But the art helps. William Bernbach, former head of Doyle, Dane & Bernbach, observed: “The facts are not enough. ... Don’t forget that Shakespeare used some pretty hackneyed plots, yet his message came through with great execution.”

Even a great ad execution must be renewed or it will become outdated. Coca-Cola cannot continue forever with a catchphrase like “The Real Thing,” “Coke Is It,” or “I’d Like to Teach the World to Sing.” Advertising wear-out is a reality.


Advertising leaders differ on how to create an effective ad campaign. Rosser Reeves of the Ted Bates & Company advertising agency favored linking the brand directly to a single benefit, as in “R-O-L-A-I-D-S spells RELIEF.”

Leo Burnett preferred to create a character that expressed the product’s benefits or personality: the Green Giant, the Pillsbury Doughboy, the Marlboro cowboy, and several other mythical personalities.

The Doyle, Dane & Bernbach agency favored developing a narrative story with episodes centered on a problem and its outcome: thus a Federal Express ad shows a person worried about receiving something at the promised time who is then reassured by using FedEx’s tracking system.

The aim of advertising is not to state the facts about a product but to sell a solution or a dream. Address your advertising to the customers’ aspirations. This is what Ferrari, Tiffany, Gucci, and Ferragamo do.

A Ferrari automobile delivers on three dreams: social recognition, freedom, and heroism. Remember Revlon founder Charles Revson’s remark: “In our factory, we make lipstick. In our advertising, we sell hope.”

But the promise of dreams only makes people suspicious of advertising. They don’t believe that their selection of a particular car or perfume will make them any more attractive or interesting.

Stephen Leacock, humorist and educator, took a cynical view of advertising: “Advertising may be described as the science of arresting the human intelligence long enough to get money from it.”

Ads primarily create product awareness, sometimes product knowledge, less often product preference, and more rarely, product purchase. That’s why advertising cannot do the job alone. Sales promotion may be needed to trigger purchase. A salesperson might be needed to elaborate on the benefits and close the sale.

What’s worse, many ads are not particularly creative. Most are not memorable. Take auto ads. The typical one shows a new car racing 100 miles an hour around mountain bends. But we don’t have mountains in Chicago.

And 60 miles an hour is the speed limit. And furthermore I can’t remember which car the ad featured. Conclusion: Most ads are a waste of the companies’ money and my time.

Most ad agencies blame the lack of creativity on the client. Clients wisely ask their agencies to come up with three ads, from mild to wild. But then the client typically settles for the mild and safe one. Thus the client plays a role in killing good advertising.

Companies should ask this question before using advertising: Would advertising create more satisfied clients than if our company spent the same money on making a better product, improving company service, or creating stronger brand experiences?

I wish that companies would spend more money and time on designing an exceptional product, and less on trying to psychologically manipulate perceptions through expensive advertising campaigns. The better the product, the less that has to be spent advertising it. The best advertising is done by your satisfied customers.

The stronger your customer loyalty, the less you have to spend on advertising. First, most of your customers will come back without you doing any advertising. Second, most customers, because of their high satisfaction, are doing the advertising for you. In addition, advertising often attracts deal-prone customers who will flit in and out in search of a bargain.

There are legions of people who love advertising whether or not it works. And I don’t mean those who need a commercial to provide a bathroom break from the soap opera.

My late friend and mentor, Dr. Steuart Henderson Britt, passionately believed in advertising. “Doing business without advertising is like winking at a girl in the dark. You know what you are doing, but nobody else does.”

The advertising agency’s mantra is: “Early to bed, early to rise, work like hell, advertise.”

But I still advise: Make good advertising, not bad advertising. David Ogilvy cautioned: “Never write an advertisement which you wouldn’t want your own family to read. You wouldn’t tell lies to your own wife. Don’t tell them to mine.”

Ogilvy chided ad makers who seek awards, not sales: “The advertising business ... is being pulled down by the people who create it, who don’t know how to sell anything, who have never sold anything in their lives ... who despise selling, whose mission in life is to be clever show-offs, and con clients into giving them money to display their originality and genius.”

Those who love advertising can point to many cases where it worked brilliantly: Marlboro cigarettes, Absolut vodka, Volvo automobiles. It also worked in the following cases:
  • A company advertised for a security guard. The next day it was robbed.
  • If you think advertising doesn’t pay—we understand there are 25 mountains in Colorado higher than Pikes Peak. Can you name one?

Those against too much reliance on advertising are fond of quoting John Wanamaker of department store fame: “I know that half the money I spend on advertising is wasted; but I can never find out which half.”

How should you develop your advertising? You have to make decisions on the five Ms of advertising: mission, message, media, money, and measurement.

The ad’s mission can be one of four: to inform, persuade, remind, or reinforce a purchase decision. With a new product, you want to inform and/or persuade. With an old product, like Coca-Cola, you want to remind. With some products just bought, you want to reassure the purchaser and reinforce the decision.

The message must communicate the brand’s distinctive value in words and pictures. Any message should be tested with the target audience using a set of six questions.
  1. What is the main message you get from this ad?
  2. What do you think the advertiser wants you to know, believe, or do?
  3. How likely is it that this ad will influence you to undertake the implied action?
  4. What works well in the ad and what works poorly?
  5. How does the ad make you feel?
  6. Where is the best place to reach you with this message—where would you be most likely to notice it and pay attention to it?

The media must be chosen for their ability to reach the target market cost-effectively. Besides the classic media of newspapers, magazines, radio, television, and billboards, there is a flurry of new media, including e-mail, faxes, telemarketers, digital magazines, in-store advertising, and advertising now popping up in skyscraper elevators and bathrooms. Media selection is becoming a major challenge.

A company works with the media department of the ad agency to define how much reach, frequency, and impact the ad campaign should achieve. Suppose you want your advertising campaign to deliver at least one exposure to 60 percent of the target market consisting of 1,000,000 people. This is 600,000 exposures.

But you want the average person to see your ad three times during the campaign. That is 1,800,000 exposures. But it might take six exposures for the average person to notice your ad three times. Thus you need 3,600,000 exposures. And suppose you want to use a high-impact media vehicle costing $20 per 1,000 exposures.

Then the campaign should cost $72,000 ($20 × 3,600,000/1,000). Notice that your company could use the same budget to reach more people with less frequency or to reach more people with lower-impact media vehicles. There are trade-offs among reach, frequency, and impact.

Next is money. The ad budget is arrived at by pricing the reach, frequency, and impact decisions. This budget must take into account that the company has to pay for ad production and other costs.

A welcome trend would be that advertisers pay advertising agencies on a pay-for-performance basis. This would be reasonable because the agencies claim that their creative ad campaigns will increase the companies’ sales.

So pay the agency an 18 percent commission if sales increase, a normal 15 percent commission if sales remain the same, and a 13 percent commission with a warning if sales have fallen. Of course, the agency will say that other forces caused the drop in sales and even that the drop would have been deeper had it not been for the ad campaign.

Now for measurement. Ad campaigns require premeasurement and postmeasurement. Ad mock-ups can be tested for communication effectiveness using recall, recognition, or persuasion measures. Postmeasurements strive to calculate the communication or sales impact of the ad campaign. This is difficult to do, though, particularly with image ads.

For example, how can Coca-Cola measure the impact of a picture of a Coke bottle on the back page of a magazine on which the company spent $70,000 to influence purchases?

At 70 cents a bottle and 10 cents of profit per bottle, Coke would have to sell 700,000 additional bottles to cover the $70,000 cost of the ad. I just don’t believe that ad will sell 700,000 extra bottles of Coke.

Companies must try, of course, to measure results of each ad medium and vehicle. If online promotions are drawing in more prospects than TV ads, adapt your budget in favor of the former. Don’t maintain a fixed allocation of your advertising budget. Move ad money into the media that are producing the best response.

One thing is certain: Advertising dollars are wasted when spent to advertise inferior or indistinct products. Pepsi-Cola spent $100 million to launch Pepsi One, and it failed. In fact, the quickest way to kill a poor product is to advertise it. More people will try the product sooner and tell others faster how bad or irrelevant it is.

How much should you spend on advertising? If you spend too little, you are spending too much because no one notices it. A million dollars of TV advertising will hardly be noticed. And if you spend too many millions, your profits will suffer. Most ad agencies push for a “big bang” budget and while this may be noticed, it hardly moves sales.

It is hard to measure something that can’t be measured. Stan Rapp and Thomas Collins put their finger on the problem in the book Beyond MaxiMarketing. “We are simply emphasizing that research often goes to great lengths to measure irrelevant things, including people’s opinions about advertising or their memories of it rather than their actions as a result of it.”

Will mass advertising diminish in its influence and use? I think so. People are increasingly cynical about and increasingly inattentive to advertising. One of its former major spenders, Sergio Zyman, exvice president of Coca-Cola, said recently, “Advertising, as you know it, is dead.”

He then redefined advertising: “Advertising is a lot more than just television commercials—it includes branding, packaging, celebrity spokespeople, sponsorships, publicity, customer service, the way you treat your employees, and even the way your secretary answers the phone.” What he is really doing is defining marketing.

A major limitation of advertising is that it constitutes a monologue. As evidence, most ads do not contain a telephone number or e-mail address to enable the customer to respond.

What a lost opportunity for the company to learn something from a customer! Marketing consultant Regis McKenna observed: “We are witnessing the obsolescence of advertising. The new marketing requires a feedback loop; it is this element that is missing from the monologue of advertising.”

Brands


Everything is a brand: Coca-Cola, FedEx, Porsche, New York City, the United States, Madonna, and you—yes, you! A brand is any label that carries meaning and associations. A great brand does more: It lends coloration and resonance to a product or service.

Russell Hanlin, the CEO of Sunkist Growers, observed: “An orange is an orange ... is an orange. Unless ... that orange happens to be Sunkist, a name 80 percent of consumers know and trust.” We can say the same about Starbucks: “There is coffee and there is Starbucks coffee.”

Are brands important? Roberto Goizueta, the late CEO of Coca-Cola, commented: “All our factories and facilities could burn down tomorrow but you’d hardly touch the value of the company; all that actually lies in the goodwill of our brand franchise and the collective knowledge in the company.” And a booklet by Johnson & Johnson reaffirms this: “Our company’s name and trademark are by far our most valuable assets.”


Companies must work hard to build brands. David Ogilvy insisted: “Any damn fool can put on a deal, but it takes genius, faith and perseverance to create a brand.”

The sign of a great brand is how much loyalty or preference it commands. Harley Davidson is a great brand because Harley Davidson motorcycle owners rarely switch to another brand. Nor do Apple Macintosh users want to switch to Microsoft.

A well-known brand fetches extra pennies. The aim of branding, according to one cynic, “is to get more money for a product than it is worth.” But this is a narrow view of the benefits that a trusted brand confers on users. The user knows by the brand name the product quality and features to expect and the services that will be rendered, and this is worth extra pennies.

A brand saves people time, and this is worth money. Niall Fitzgerald, chairman of Unilever, observed: “A brand is a store-house of trust that matters more and more as choices multiply. People want to simplify their lives.”

The brand amounts to a contract with the customer regarding how the brand will perform. The brand contract must be honest. Motel 6, for example, offers clean rooms, low prices, and good service but does not imply that the furnishings are luxurious or the bathroom is large.

How are brands built? It’s a mistake to think that advertising builds the brand. Advertising only calls attention to the brand; it might even create brand interest and brand talk.

Brands are built holistically, through the orchestration of a variety of tools, including advertising, public relations (PR), sponsorships, events, social causes, clubs, spokespersons, and so on.

The real challenge is not in placing an ad but to get the media talking about the brand. Media journalists are on the lookout for interesting products or services, such as Palm, Viagra, Starbucks, eBay. A new brand should strive to establish a new category, have an interesting name, and tell a fascinating story.

If print and TV will pick up the story, people will hear about it and tell their friends. Learning about a brand from others creates credibility. Learning about it only through paid advertising is easy to dismiss because of the biased nature of advertising.

Don’t advertise the brand, live it. Ultimately the brand is built by your employees who deliver a positive experience to the customers. Did the brand experience live up to the brand promise? This is why companies must orchestrate the brand experience with the brand promise.

Choosing a good brand name helps. A consumer panel was shown the pictures of two beautiful women and asked who was more beautiful. The vote split 50–50. Then the experimenter named one woman Jennifer and the other Gertrude. The woman named Jennifer subsequently received 80 percent of the votes.

Great brands are the only route to sustained, above-average profitability. And great brands present emotional benefits, not just rational benefits. Too many brand managers focus on rational incentives such as the brand’s features, price, and sales promotion, which contribute little to growing the brand-customer relationship.

Great brands work more on emotions. And in the future, great brands will show social responsibility—a caring concern for people and the state of the world.

A company needs to think through what its brand is supposed to mean. What should Sony mean, Burger King mean, Cadillac mean? A brand must be given a personality. It must thrive on some trait(s). And the traits must percolate through all of the company’s marketing activities.

Once you define the attribute(s) of your brand, you need to express them in every marketing activity. Your people must live out the brand spirit at the corporate level and at the job-specific level.

Thus if your company brands itself as innovative, then you must hire, train, and reward people for being innovative. And being innovative must be defined for every job position, including the production supervisor, the van driver, the accountant, and the salesperson.

The brand personality must be carried out by the company’s partners as well. The company cannot allow its dealers to compromise the brand by engaging in price-cutting against other dealers. They must represent the brand properly and deliver the expected brand experience.

When a brand is successful, the company will want to put the brand name on additional products. The brand name may be put on products launched in the same category (line extension), in a new category (brand extension), or even in a new industry (brand stretch).

Line extension makes sense in that the company can coast on the goodwill that it has built up in the category and save the money that it would otherwise have to spend to create brand awareness of a new name and offering. Thus we see Campbell Soup introducing new soups under its widely recognized red label.

But this requires the discipline of adding new soups while subtracting unprofitable soups from the line. The new soups can cannibalize the sales of the core soups without bringing in much additional revenue to cover the additional costs.

They can reduce operational efficiency, increase distribution costs, confuse consumers, and reduce overall profitability. Some line extensions are clearly worth adding, but overuse of line extensions must be avoided.

Brand extension is riskier: I buy Campbell’s soup but I might be less interested in Campbell’s popcorn. Brand stretch is even more risky: Would you buy a Coca-Cola car?

Well-known companies tend to assume that their great name can carry them successfully into another category. Yet whatever happened to Xerox computers or Heinz salsa? Did the Hewlett-Packard/Compaq iPAQ Pocket PC overtake the Palm handheld or did Bayer acetaminophen overtake Tylenol? Is Amazon electronics as successful as Amazon books? Too often the company is introducing a me-too version of the product that ultimately loses to the existing category leaders.

The better choice would be to establish a new name for a new product rather than carry the company’s name and all of its baggage. The company name creates a feeling of more of the same, rather than something new. Some companies know this.

Toyota chose not to call its upscale car Toyota Upscale but rather Lexus; Apple Computer didn’t call its new computer Apple IV but Macintosh; Levi’s didn’t call its new pants Levi’s Cottons but Dockers; Sony didn’t call its new videogame Sony Videogame but PlayStation; and Black & Decker didn’t call its upgraded tools Black & Decker Plus but DeWalt.

Creating a new brand name gives more opportunity to establish and circulate a fresh public relations story to gain valuable media attention and talk. A new brand needs credibility, and PR is much better than advertising in establishing credibility.

Yet every rule has its exceptions. Richard Branson has put the name Virgin on several dozen businesses, including Virgin Atlantic Airways, Virgin Holidays, Virgin Hotels, Virgin Trains, Virgin Limousines, Virgin Radio, Virgin Publishing, and Virgin Cola.

Ralph Lauren’s name is found on numerous clothing products and home furnishings. Still a company has to ask: How far can the brand name be stretched before it loses its meaning?

Al Ries and Jack Trout, two keen marketing thinkers, are against most line and brand extensions; they see it as diluting the brand. To them, a Coke should mean an eight-ounce soft drink in the famous Coke bottle.

But ask today for a Coke and you will have to answer whether you want Coca-Cola Classic, Caffeine Free Coca-Cola Classic, Diet Coke, Diet Coke with Lemon, Vanilla Coke, or Cherry Coke—and do you want it in a can or a bottle? Vendors used to know what you wanted when you asked for a Coke.

Brand pricing is a challenge. When Lexus started to make inroads against Mercedes in the United States, Mercedes wasn’t going to lower its price to match Lexus’ lower price. No, some Mercedes managers even proposed raising Mercedes’ price to establish that Mercedes is selling prestige that the buyer can’t get from a Lexus.

But brand price premiums today are shrinking. A leading brand in the past could safely charge 15 to 40 percent more than the average brand; today it would be lucky to get 5 to 15 percent more.

When product quality was uneven, we would pay more for the better brand. Now all brands are pretty good. Even the store’s brand is good. In fact, it probably is made by the national brand to the same standards. So why pay more (except for show-off brands like Mercedes) to impress others?

In recessionary times, price loyalty is greater than brand loyalty. Customer loyalty may reflect nothing more than inertia or the absence of something better. As someone observed, “There is nothing that a 20 percent discount won’t cure.”

A company handles its brands through brand managers. But Larry Light, a brand expert, doesn’t think that brands are well managed. Here is his plaint: “Brands do not have to die. They can be murdered. And the marketing Draculas are draining the very lifeblood away from brands. Brands are being bargained, belittled, bartered and battered. Instead of being brand-asset managers, we are committing brand suicide through self-inflicted wounds of excessive emphasis on prices and deals.”

Another concern is that brand management structures may militate against carrying out effective customer relationship management (CRM) practices. Companies tend to overfocus and overorganize on the basis of their products and brands, and underfocus on managing their customers well. Call it brand management myopia.

Heidi and Don Schultz, marketing authors, believe that the consumer packaged goods (CPG) model for brand building is increasingly inappropriate, especially for service firms, technology firms, financial organizations, business-to-business brands, and even smaller CPG companies.

They charge that the proliferation of media and message delivery systems has eroded mass advertising’s power. They urge companies to use a different paradigm to build their brands in the New Economy.
  • Companies should clarify the corporation’s basic values and build the corporate brand. Companies such as Starbucks, Sony, Cisco Systems, Marriott, Hewlett-Packard, General Electric, and American Express have built strong corporate brands; their name on a product or service creates an image of quality and value.
  • Companies should use brand managers to carry out the tactical work. But the brand’s ultimate success will depend on everyone in the company accepting and living the brand’s value proposition. Prominent CEOs—such as Charles Schwab or Jeff Bezos—are playing a growing role in shaping brand strategies.
  • Companies need to develop a more comprehensive brand-building plan to create positive customer experiences at every touch point—events, seminars, news, telephone, e-mail, person-to-person contact.
  • Companies need to define the brand’s basic essence to be delivered wherever it is sold. Local executions can be varied as long as they deliver the feel of the brand.
  • Companies must use the brand value proposition as the key driver of the company’s strategy, operations, services, and product development.
  • Companies must measure their brand-building effectiveness not by the old measures of awareness, recognition, and recall, but by a more comprehensive set of measures including customer perceived value, customer satisfaction, customer share of wallet, customer retention, and customer advocacy.

Business-to-Business Marketing

Most marketing is business-to-business (B2B) marketing even though textbooks and business magazines devote most of their attention to business-to-consumer (B2C) marketing.

The disproportionate attention to B2C has been justified by saying that (1) B2C is where most of modern marketing concepts first arose, and (2) B2B marketers can learn a lot by adopting B2C thinking.

While these two statements are true, B2B is having its own renaissance, and maybe B2C marketers have a lot to learn from B2B practices. B2B, in particular, has focused more on individual customers, and B2C is increasingly moving into one-to-one customer thinking.

The sales force is the main driver in B2B marketing. Its importance cannot be overestimated, especially when selling complex customized equipment such as B-47s or power plants or selling to large national and global accounts.


Today’s companies increasingly assign national and global account managers to manage their largest customers. Account management systems will grow in the future as more of the world’s business becomes concentrated in fewer but larger companies.

But today B2B companies also are driven to replace high-cost sales calls with less expensive contact channels such as tele- and videoconferencing and Web-based communications, where possible.

As ideoconferencing improves and costs come down, companies will reduce the number of field visits to customers and save on the high costs of transportation, hotels, dining out, and entertaining.

Another force that might reduce the role of the sales force is the growth of Web-based market exchanges. Price differences—especially for commodity materials and components—will become more visible, thus making it harder for salespeople to influence buyers to pay more than the market price.

Change

Change, not stability, is the only constant. Companies today have to run faster to stay in the same place. Some say that if you remain in the same business, you will be out of business. Note that companies such as Nokia and Hewlett-Packard gave up their original businesses. Survival calls for self-cannibalization.

Your company has to be able to recognize Strategic Inflection Points, defined by Andy Grove of Intel as “a time in the life of a business when its fundamentals are about to change.” Banks had to make changes with the advent of automated teller machines (ATMs), and major airlines have to make changes with the new competitors coming from low-fare airlines.

Jack Welch at GE admonished his people: “DYB: Destroy your business. ... Change or die. When the rate of change inside the company is exceeded by the rate of change outside the company, the end is near.”

Tom Peters’ advice: “To meet the demands of the fast-changing competitive scene, we must simply learn to love change as much as we hated it in the past.”


I have noticed that American and European business people respond differently to change. Europeans see it as posing a threat. Many Americans see it as presenting opportunities.

The companies that fear change most are many of today’s leading companies. As incumbents, they have invested so much in their present tangible assets that they tend to either ignore or fight the insurgents. Because they are big, they think they are built to last.

But being big is no guarantee against becoming irrelevant, as Kmart, A&P, and Western Union discovered. If companies don’t want to be left behind, they must anticipate change and lead change. The ability to change faster than your competitors amounts to a competitive advantage.

Richard D’Aveni, the author of Hypercompetitive Rivalries, observed: “In the end, there will be just two kinds of firms: those who disrupt their markets and those who don’t survive the assault.”

But how do you change a company? How do you get your employees to adopt a new mind-set and give up their comfortable activities and learn new ones? Clearly top management must develop a new compelling vision and mission whose benefits for the various stakeholders appear far greater than the risk and cost of change. Top management must gather support and apply internal marketing to produce change in the organization.

The best defense in the face of change is to create a company that thrives on change. The company would see change as normal rather than as an interruption of the normal. And it would attract people who have positive attitudes toward change.

It would institute open discussions of policy, strategy, tactics, and organization. The worst thing is to be a company that dislikes change. Such a company will attract people who dislike change, and the end is inevitable.

As Reinhold Niebuhr stated: “God, give us grace to accept with serenity the things that cannot be changed, courage to change the things that should be changed, and the wisdom to distinguish the one from the other.”

Communication and Promotion

Among the most important skills in marketing are communication and promotion. Communication is the broader term, and it happens whether planned or not. A salesperson’s attire communicates, the catalog price communicates, and the company’s offices communicate; all create impressions on the receiving party.

This explains the growing interest in integrated marketing communications (IMC). Companies need to orchestrate a consistent set of impressions from its personnel, facilities, and actions that deliver the company’s brand meaning and promise to its various audiences.

Promotion is that part of communication that consists of company messages designed to stimulate awareness of, interest in, and purchase of its various products and services. Companies use advertising, sales promotion, salespeople, and public relations to disseminate messages designed to attract attention and interest.

Promotion cannot be effective unless it catches people’s attention. But today we are deluged with print, broadcast, and electronic information. We confront 2 billion Web pages, 18,000 magazines, and 60,000 new books each year.


In response, we have developed routines to protect ourselves from information overload. We toss most catalogs and direct mail unopened into the wastebasket; delete unwanted and unread e-mail messages; and refuse to listen to telephone solicitations.

Thomas Davenport and John Beck point out in The Attention Economy that the glut of information is leading to attention deficit disorder (ADD), the difficulty of getting anyone’s attention. The attention deficit is so pronounced that companies have to spend more money marketing than making the product.

This is certainly the case with new perfume brands and many new films. Consider that the makers of The Blair Witch Project spent $350,000 making the film and $11 million to market it.

As a result, marketers need to study how people in their target market allocate their attention time. Marketers want to know the best way to get a larger share of consumers’ attention.

Marketers apply attention-getting approaches such as high-profile movie stars and athletes; respected intermediaries close to the target audience; shocking stories, statements, or questions; free offers; and countless others.

Even then, there is a question of effectiveness. It is one thing to create awareness, another to draw sustained attention, and still another to trigger action. Attention is to get someone to spend time focusing on something. But whether this leads to buying action is another question.

Companies

It has been observed that there are four types of companies:
  1. Those that make things happen.
  2. Those that watch things happen and respond.
  3. Those that watch things happen and don’t respond.
  4. Those that didn’t notice that anything had happened.
No wonder the average company disappears within 20 years. Of the companies listed as best in the Forbes 100 of 1917, only 18 survived to 1987. And only two of them, General Electric and Eastman Kodak, were making good money.

And not all existing companies are truly alive. Companies fool us by merely breathing day to day. General Motors and Sears have been losing shares for years even though their hearts are still ticking. You can enter some companies and tell within 15 minutes whether they are alive or dead, just by looking at the employees’ faces.

I no longer know what a large company is. Company size is relative. Boeing, Caterpillar, Ford, General Motors, Kellogg, Eastman Kodak, J. P. Morgan, and Sears are giant companies. But in early 2000 Microsoft Corporation achieved a market value that exceeded that of all eight companies combined.


What makes some companies great? There’s a whole string of books ready to tell us the answer. Tom Peters and Bob Waterman started the guessing game with In Search of Excellence in 1982. Of the 70 companies they nominated, many are moribund today.

Then we heard from Jim Collins and Jerry Porras in Built to Last (1994), Michael Treacy and Fred Wiersema in The Discipline of Market Leaders (1995), Arie De Geus in The Living Company (1997), and most recently from Jim Collins again in Good to Great: Why Some Companies Make the Leap . . . and Others Don’t (2001).

These books point out the many correlations of successful companies. But I have a simple thesis: Companies last as long as they continue to provide superior customer value.

They must be market-driven and customer-driven. In the best cases, they are market-driving. They create new products that people may not have asked for but afterwards thank them for. Thanks to Sony for your Walkman, your smaller storage disks, your incredible camcorders, and your innovative computers.

Customer-oriented companies make steady gains in mind share and heart share, leading to higher market shares and in turn to higher profit shares.

Tom Siebel, CEO of Siebel Systems, has a simple but comprehensive view of what creates great companies. “Focus on satisfying your customers, becoming a market leader, and being known as a good corporate citizen and a good place to work. Everything else follows.” (See Customer Orientation.)

Competitive Advantage

Michael Porter popularized the notion that a company wins by building a relevant and sustainable competitive advantage. Having a competitive advantage is like having a gun in a knife fight.

This is true, but today most advantages don’t stay relevant and few are sustainable. Advantages are temporary. Increasingly, a company wins not with a single advantage but by layering one advantage on top of another over time.

The Japanese have been masters at this, first coming in with low prices, then with better features, then with better quality, and then with faster performance. The Japanese have recognized that marketing is a race without a finishing line.

Companies can build a competitive advantage from many sources, such as superiority in quality, speed, safety, service, design, and reliability, together with lower cost, lower price, and so on. It is more often some unique combination of these, rather than a single silver bullet, that delivers the advantage.


A great company will have incorporated a set of advantages that all reinforce each other around a basic idea. Wal-Mart, IKEA, and Southwest Airlines have unique sets of practices that enable them to charge the lowest prices in their respective industries. A competitor that copies only a few of these practices will not succeed in gaining an advantage.

Recognize that competitive advantages are relative, not absolute. If the competition is improving by 30 percent and you by 20 percent, you are losing competitive advantage. Singapore Airlines kept improving its quality, but Cathay Pacific was improving its quality faster, thereby gradually closing the gap with Singapore Airlines.

Competitors

All firms have competitors. Even if there were only one airline, the airline would have to worry about trains, buses, cars, bicycles, and even people who might prefer to walk to their destinations.

The late Roberto Goizueta, CEO of Coca-Cola, recognized Coke’s competitors. When his people said that Coke’s market share was at a maximum, he countered that Coca-Cola accounted for less than 2 ounces of the 64 ounces of fluid that each of the world’s 4.4 billion people drank every day. “The enemy is coffee, milk, tea, water,” he told his people. Coca-Cola is now a major seller of bottled water.

The more success a company has, the more competition it will attract. Most markets are brimming with whales, barracudas, sharks, and minnows. In these waters, the choice is to eat lunch or be lunch. Or, using computer scientist Gregory Rawlins’ metaphor: “If you’re not part of the steamroller, you’re a part of the road.”

Hopefully your company will attract only good competitors. Good competitors are a blessing. They are like good teachers who raise our sights and sharpen our skills. Average competitors are a nuisance. Bad competitors are a pain to every decent competitor.


A company should never ignore its competitors. Stay alert. “Time spent in reconnaissance is seldom wasted,” noted Sun Tzu in the fourth century B.C. And your allies should stay alert. If you are going to be an effective competitor, you must also be an effective cooperator.

You are not a solo business but a partnership, a network, an extended enterprise. Competition today is increasingly between networks, not companies. And your ability to spot faster, learn faster, and work faster as a network is a key competitive advantage.

In the short run, the most dangerous competitors are those that resemble your company the most. The customers can’t see the difference. Your company is a toss-up in their mind. So differentiate, differentiate, differentiate.

According to marketing guru Theodore Levitt: “The new competition is not between what companies produce in their factories, but between what they add to their factory output in the form of packaging, services, advertising, customer advice, financing, delivery arrangements, warehousing, and other things that people value.”

The way to beat your competitors is to attack yourself first. Work hard to make your product line obsolete before your competitors do.

Watch your distant competitors as well as your close ones. My guess is that your company is more likely to be buried by a new disruptive technology than by nasty look-alike competitors.

Most fatal competition will come from a small competitor who burns with a passion to change the rules of the game. IBM made the mistake of worrying more about Fujitsu than a nobody named Bill Gates who was working on software in his garage.

As important as it is to watch your competitors, it is more important to obsess on your customers. Customers, not competitors, determine who wins the war. Most markets are plagued by too many fishermen going after too few fish. The best fishermen understand the fish better than their competitors do.

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