Monday, March 23, 2009

The Continuing Brilliance of Philip Kotler

I saw a short video the other day on YouTube of Philip Kotler talking to a class at the London School of Business. For those unfamiliar with Kotler, he is the single most important figure in marketing and has been for decades. I use the 13th edition of his textbook, Marketing Management, now co-authored with Kevin Keller, in my teaching. On my bookshelf is the 2nd edition which I read in graduate school. He has been more prolific than 3-4 normal people.

Anyway, he has a new perspective on the role of marketing. He says that it can be captured by the acronym CCDVTP: Create, Communicate, and Deliver Value to a Target for a Profit. He goes on to note that there are three primary roles for marketing: value management, brand management and customer management.

This is certainly not an earth shattering concept. Many people have been talking about this being the role of marketing for years, but Kotler is able to synthesize this and put it into a tight perspective.

Value is the first key--and it is probably the most important, because without value, we do not have a business at all. The only problem I have with this is that too many people will immediately think that they need to manage value from their perspective and commmunicate with or persuade customers to see the value. Value is a customer proposition. Value comes when the customer finds what he/she is looking for--the solution to their needs and wants. It comes in context with competitive offerings.

Brand management vs. product management is a major advancement. As a person who focuses on brand and reputation, I applaud this perspective. Product management has always seemed to me to be too inside-out. Brand management, like value, connects with the customer. Brands are attributes that help to delineate markets and attract customers.

Finally, customer management brings all of this together. Marketing is about customer management. While marketing talks about stakeholders, the real focus is on the customer. This is where marketing and corporate communication diverge in terms of reputation. Communicators must consider all stakeholders; marketing prioritizes with the customer first among others. This is why communications and marketing must be partners in an organization--there needs to be a balance so that the organization can understand the impact of all stakeholders on their ability to succeed. Marketing can become too myopic at times.

Take the 6-minutes to watch the Kotler video on YouTube. It will more time well spent.

Sunday, March 22, 2009

This is the Time to Enhance Customer Relationships

The economy is lousy. There is no sector that has not been impacted by the recession. Most companies are going into retrenchment, cutting costs, pulling in and going into survival mode. While cost containment is the right business strategy for the current economy, the companies that will be the big losers will be those who also withdraw from customer engagement.

The problem that I have always had with company strategy during bad economic times is that the business model gets run by accountants. They look for ways to shore up the books and the way they are taught to do it is by cutting costs. But, to paraprase Henry Mintzberg, a professor of management at McGill University, "how did we ever come to believe that managing money is the way to manage a business?"

The way to manage a business is to manage relationships with employees and customers and to leveage those to create financial rewards. Managing money as the primary focus puts relationships secondary when they should be primary. Financial rewards are a proxy for doing things right.

This is a good time for companies to take a brand inventory and to get rid of those brands that no longer are performing and cannot be rejuvenated; and it is a good time to pay close attention to customers and to retaining the best customers the organization has. It costs little money to focus on customer relationships, yet so many companies feel that customer involvement is a cost rather than an investment. There are a few companies in this bad economy that are building stronger relationships with customers. They will be the big winners when the economy turns up again.

What does this have to do with the brand inventory? For many companies, branding occurs in customer relationships, where the real differentiation for them happens. For others, who are cost efficiency leaders, customer relationships may have less importance, but by increasing their focus on customers, they can take a dual strategy that further erodes the market of competitors who might have been higher priced and need to retrench even more in tough times. Every company should be looking at the real points of differentiation they have had and could still have.

There was an excellent article in Harvard Business Review by Johnson, Christensen and Klagmann on how to rejuvenate a business model. They note that there are four key issues: a customer value proposition, a profit model, core competencies and business processes. We should be looking at both our product and corporate brands to determine if they need to be rejuvenated, along with the overall business model of the enterprise. As Philip Kotler notes, we need to be engaged in three areas: value management, brand management and customer management. For anyone involved in or responsible for relationships--whether they be in corporate communications, marketing or general management--it is time that they refocus on customers and not allow themselves to pull away from them.

Tuesday, March 17, 2009

What Canada Could Teach the United States

I lived in the Toronto area for about 10 1/2 years. It was a great experience for my family. My daughter, Allyson, who is 28-years old, lives in Montreal and has become for all practical purposes totally Canadian. We all hold dual US and Canadian citizenship. My wife and I took dual citizenship while we were there to allow us to vote and to allow our kids, Allyson and Adam, a choice of where to live when they were out of school. Allyson chose Canada. Adam, who came to the US to play baseball in college, stayed in the US. He likely would return to Canada if business permitted it.

When I listen to the news and read stories about Bernie Madoff or AIG or Citi or Merrill Lynch, I think about Canada and what it could teach the US. Sure there have been Canadian scandals. Konrad Black, former CEO of Holllinger, was no saint. He is in jail for using company assets as his personal ones. He was found guilt in US court. Canada doesn't come down as hard on white collar criminals--or any criminals for that matter--as does the US.

That's not what Canada can teach us. What it can teach us is how to live within our means and to demonstrate shared, communal responsibility. As greedy as we have become, Canadians have continued to be responsible. Their banks continue to be profitable. They did not make bad loans. They required lenders to have the collateral to justify the loan--what a concept!! Unlike Americans, Canadians cannot deduct their mortgage interest from their taxes, so there is no incentive to buy a house well above ones means. Canadians buy what they can afford to buy.

But there is something more that motivates Canadians. There is a sense of equity within society that we do not understand. I must honestly admit that I found this concept rather strange. Growing up in the US, we are socialized to accept the fact that there are inequalities in education, healthcare, living conditions, etc. Canadians do not like to accept these things. All colleges are government run in an effort to keep them fairly equal in terms of quality. Certainly there are differences, but they are not the dramatic differences in quality of education we find in the US. Healthcare is universal in Canada. The system there is breaking; people cannot find doctors; there is a need for reform. Yet no politician in Canada, not even conservatives, will argue for private healthcare like that in the US. Why? Because it would bring inequality to the system. It would divide the country up between those who can and cannot afford the best. This concept seems to be contrary to the Canadian conscience, with the possible exception of Alberta, a western Province that is more akin to the western US than it is to the rest of Canada. It is, as someone said: "The Republican Province of Canada". The rest of Canada seems to vacillate between semi-conservative, by US standards, and socialist.

Socialism in the US is the ultimate "boogie man". We thow around the term without understanding the underlying economic or social concept. Socialism is not communism. Rather, it is a system in which there is an attempt to shrink the vast differences between the haves and have-nots. Wealth is taxed at a high level to allow those who have nothing have a life. While this may not be the world loved by the right-wing in the US, it helps to make the society a bit more community oriented, a bit more socially conscious, a bit more caring.

I saw the dramatic difference with my own children when they graduated from high school in Canada. Canadians do not take the SAT or ACT. They go to college based upon their grades. There is not the pressure that students in the US feel that they must go to the "best school" to get the best jobs and have the good life. One usually does not know where a Canadian went to college (they call it university if it is a 4-year institution). They don't find status in their university education because there is a sense of equality in all who went to university. Also, that would be a bit more bragging than Canadians are used to.

When I lived in Canada, I often thought that Canadians were a bit boring. They didn't push for the "gold" in everything like Americans. They wanted to succeed, but didn't think it was the end of the world if they didn't. They worked to live; they didn't live to work.

I miss that spirit of community and shared responsibility. I miss that social consciousness. I wish we would gain some of that in the U.S. I am tired of reading about the Bernie Madoffs and AIGs and thinking that these are the products of my society--these are the people we applauded for many years because they were the smartest and the richest. They were the embodiment of America. Well, America, look what we have wraught. It is not a pretty sight!!

And We Have a Winner...AIG is Now As Bad or Worse than Enron

We have a new poster child for poor reputation management--AIG. This is a company that insured the bad loans of the banks which nearly put them out of business. They required two different transfusions of money from the US government. We, the taxpayers, now own the majority of the company. Without our money, they would have failed.

What did this company do? Did it get rid of the group in its financial-product division that played fast and loose with its insurance coverage and never accrued enough money to cover its potential claims? No, they rewarded this group with bonuses. We have learned that 73 AIG executives got more than $1 million bonuses, including 11 who don't even work for the company any more. The company claims it signed employment agreements with the employees that guaranteed the bonuses and they are contractually obligated to pay them.

I think it is time we asked AIG management a simple question: "are you the dumbest people alive or just the most inept? To sign agreements to commit to bonuses without knowing the outcome is beyond stupidity. It is bad business. So, AIG would have to answer affirmatively to both parts of the question: they are both dumb and inept. We wouldn't let an undergrad come up with a plan to pay bonuses for negative performance, yet this is what we have learned has been happening at one of Wall Street's premier companies. Amazing!!

The brazennees of all of this boggles the mind. One has to just shake ones head and wonder where the moral compass of these people has gone. They were playing in a game with rules that few of us have ever played in. Most of us have believed that our actions have consequences. Now we recognize that AIG played with a rule book that said that actions do not have consequences. Do whatever you want and you still get bonused. Don't want you to give up that house in the Hamptons!

From a reputational standpoint, one has to question whether there is any potential redemption for AIG. They have so damaged the reputation of the company that it is really questionable whether the name AIG should survive. I suspect that the business will eventually be broken up and the best surviving piece will be forced to start anew under a new name.

Trust is the currency in a market economy. Who trusts AIG anymore? We know they take bad loans. We know that they have such a poor culture that they cannot manage themselves--remember that this is the same company recently chastised for throwing extravagent parties after receiving government money. They simply don't get it.

Reputational damage has consequences. Can you imagine how many good people want to stay employed there? Once the economy starts to turn up, the good people at AIG will be gone. There is no pride in the company and pride, or affinity, is a prime motivator in attraction and retention of talent. Their actions also make it more difficult for President Obama to ask Congress for more money to shore up the financial section. They have impacted perceptions far beyond their own door.

Bill Kristol, the neo-con columnist recently wrote a piece that asked one of the most important questions of our time: "can capitalism survive capitalists". If AIG is any indication, it cannot.

Thursday, March 12, 2009

Drug Companies May Be Forfeiting Market Value Due to Poor Brand and Reputation Strategy

The recent news that Pfizer planned to buy Wyeth was followed by news that Merck planned to buy Schering-Plough. In both cases, the acquiring company planned to drop the name of their partner, despite the fact that the acquisitions were deemed important to bolster the sagging market value and future of both Pfizer and Wyeth. In contrast, when Glaxo bought SmithKline, it adopted a new name of GlaxoSmithKilne; Astra and Zeneca merged to form AstraZeneca; or Novartis was created as a new name after the merger of Ciba-Geigy and Sandoz (the Sandoz name was actually retained for the Novartis generic products business).

Pfizer and Merck are American companies, while the others mentioned are European companies. The difference in the approach shows a greater recognition in Europe for intangible assets, such as brand equity, capacity for innovation, and human resources of corporate brand and reputation. In fact, many European and Asian countries allow greater flexibility in recognizing the value of intangible assets than do U.S. accounting rules. But, this is only part of the story. I think that much can also be found in the brand strategies followed by most U.S.-based pharmaceutical companies that lead to less value being seen in the corporate brand and reputation, and this should be a lesson to all other companies facing potential acquisition.

Most pharmaceutical companies operate with a brand strategy that is called a “house of brands architecture”. Procter & Gamble and Unilever are the two most famous companies using this brand strategy. They created this brand strategy so that they could have lots of products, some competing with one another, without having the consumer aware of all of the products from the same company serving the same market. Each product can be aimed at a specific segment of the market, and each can be supported by its own marketing mix of price, distribution, promotion and packaging.

Pharmaceutical companies have historically followed a similar brand strategy. While the products are presented (or, as the industry calls it “detailed”) to the physician by a sales person from the company, the focus of attention in the sales call is on the product, not on the value of the company that made the product. I was a pharmaceutical salesman in the early 1970s, and little has changed since that time in the way drugs are detailed. Moreover, most pharmaceutical companies have an over-the-counter (OTC) line of products that are well known by their brand names, but unknown for their connection to the parent company.

I believe that the brand strategies for non-consumer products companies need to be rethought and I have counseled a variety of companies on smarter ways to structure their brand portfolios. I believe that companies need to look at themselves from the market back into themselves, not from the inside-out the way they might like to organize brands or the way they have always done it. After someone first recognizes the need to buy something, they look at the alternatives, and then at evaluative criteria to narrow the choice. Brand names and corporate reputation help to influence alternatives and evaluation in many purchase situations. The corporate name and reputation is considered of little importance in the consumer products purchase.

Brands and reputation help to reduce perceived risk in the purchase. When there is a lot of perceived risk to a person’s health, security, social status, the amount of complexity in making a decision goes up. Again, the company behind the brand can help to lessen the perceived risk. When the risk and complexity are high, people tend to turn to outside sources for evaluation—other people, regulatory organizations, Consumer Reports, etc. Consumer products sales are heavily driven by advertising, direct mail, sales support and the distribution channel, to get us to recognize and recall the product when we are prepared to buy. High risk, high complexity products are driven by referrals and personal sales. We want to make certain that the company making such products are tops in their class, and we seek confirmation from other sources.

The marketing channel for a pharmaceutical brand is more similar to the non-consumer products market, yet the brand strategies adopted by pharmaceutical companies have more closely mirrored consumer products companies. The tide may have been turning against the brand strategies of the pharmaceutical companies many years ago. The Internet has allowed the patient into the information loop and many are looking up the companies behind their products to make certain they feel comfortable with them. In addition, PriceWaterhouseCoopers did a study in 2007, in which it found that about 78% of patients said that the reputation of the pharmaceutical company would matter to them in selecting a product or accepting a prescription from their doctor; yet, only 30% of the pharmaceutical executives in this study felt that corporate reputation was important. Why the continuing disconnect? Legacy thinking dies hard in many companies. Also, drug companies have for years thought of the physician as their customer. They have now realized that the patient is the customer and the doctor and pharmacist are distributors. Many have turned to direct-to-consumer (DTC) advertising is hopes of creating pull marketing, which hopes to bring potential patients into doctor’s offices asking about the product. Many of these DTC ads are now referencing the company behind the ads, not just the name of the drug.

Some drug companies have been changing the “rules”. AstraZeneca started to boost its corporate reputation a few years ago and they have seen very positive results. Barron’s did a study in 2009 amongst money managers of the most reputable companies globally and AstraZeneca was ranked #52 globally, despite being unranked in this study the year before. Wyeth was #37, after having been unranked the year before, while Pfizer dropped from #41 to #55 between 2008 and 2009. So, Pfizer, which has seen its reputation fall in recent years purchased Wyeth to become a biological company and then decides to drop the name of Wyeth.

According to studies by Cap Gemini Ernst & Young, between 80-85% of the market value of most companies is comprised of intangible assets. Yet none of these intangible assets appear on the balance sheet. This is another way of saying that the worth of a brand name like Toyota or Apple or GE or Wyeth does not exist. That’s certainly the way it seems the people at Pfizer looked at the world. One can only wonder how much more market value might be realized by pharmaceutical companies if they would invest more in their corporate brand and reputations. Shareholders should be demanding more attention to corporate brand and reputation. Without it, they are potentially leaving “money on the table” following an acquisition.