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Welcome to
Marketing Principles and Processes
Module 1
WHAT IS MARKETING?
Peter R. Dickson
©Backbone Press 2009
The Big Picture
This is all we have.
All we will ever have.
Space-ship Earth. Using her
resources the best way we can today
and tomorrow is our sacred responsibility.
The Big Picture
The answer is ever better
innovation and diffusion of new
products and services that better use scarce
resources, and do not destroy the Commons: our
common air, common water, common values and common good.
The Big Picture
Marketing is the business
discipline responsible for innovation
and diffusion of innovation processes. The
one discipline taught in Business Schools that teaches
product and brand development processes’ best practice, customer
relationship and service best practice, and supply chain best practice.
The Big Picture
Before we discuss the practice of
profitable marketing, we apply fundamental
economic theory to explain why superior marketing is so
important to the future of the Earth, the future of the United States
and, for that matter, every nation. The following is just one example…
Marketing and Humanity
Between 1935 and 1965, the infant death rate around
the world decreased by 90% as a result of the
world-wide diffusion of antibiotics. The efficient
diffusion system that developed created a new
world-wide market so everyone, everywhere could
have access to the new drugs. The result was a
world-wide increase in life-expectancy of 10 years.
Marketing and Humanity
Great innovation and great diffusion of the innovation.
It is one of the most successful meeting-a-need
marketing success stories ever told and that will ever
be told: the invention, development, branding,
advertising, selling, pricing, distribution and after
sales-servicing of antibiotics.
It is the practice of profitable marketing at its best.
Prosperity and Wealth Creation
The first principle of wealth creation is that progress,
happiness and wealth comes from the value that
technological innovation adds in use: e.g., electric
cars over gasoline driven cars.
Schumpeter Wealth Creation Principle
This value that technological innovation (large or
small) adds in use is called the Schumpeter
Principle, after economist Joseph Schumpeter who
called it “creative destruction”.
So what is Marketing? Marketing is responsible for
the product development process and the direction
of research and development that creates such
innovation and creative destruction.
The Smith Wealth Creation Principle
The second fundamental principle of wealth creation
is that trading exchanges create wealth. We call
this the Smith Principle after Adam Smith, who
used this principle in his famous book An Inquiry
into the Nature and Causes of the Wealth of
Nations, as an argument for global free-trade. It is
explained in the following example.
The Smith Wealth Creation Principle
Two individuals, X and Y meet. X has 10 Units of A
in his possession and ownership and Y has 10 units
of B in his possession and ownership. They discuss
whether they would like to barter two units of A
for two units of B.
X agrees because he values two of B much more than
two of his 10 units of A. Y agrees because he
values two of A much more than two of his 10
units of B. They make the exchange. (Economies
of Scope are represented here)
The Smith Wealth Creation Principle
Kaboom
Wealth is created!
The Smith Wealth Creation Principle
Both X and Y now own possessions that are more
valuable than before the exchange.
Value, wealth and welfare have been increased by the
trade.
As A and B generalize to anything (including A or B
being money). It is the principle behind free-trade,
and the encouragement of more trade that creates
more exchanges that creates more wealth.
Marketing and Wealth Creation
Marketing is responsible for all exchange processes
with customers and for creating customer
exchanges. It is also responsible for creating
profitable product and service innovations.
Marketing is responsible for these two wealth
creating effects and their dynamic.
The Wealth Creation Dynamic
The dynamic is that these two wealth creation effects
(innovation and exchange) amplify each other. It is
called a positive feedback system.
A positive feedback effect is when A increases B and
B increases A. Thus if A increases then B
increases, which leads to a further increase in A,
which leads to a further increase in B.
It can be visualized as the following.
The Wealth Creation Feedback Effect
Innovation
Pot of
gold
Exchanges
Innovations create more exchanges, more exchanges
create more wealth and capital that is invested in
more innovation and creating more exchanges.
The Wealth Creation Feedback Effect
Innovation
Bigger
pot of
gold
Exchanges
As innovation increases, exchanges increase and the
wealth and capital increases. Capital is both a driver
and a product of this dynamic.
The Wealth Creation Feedback Effect
Innovation
Even
Even
bigger
bigger Pot
Pot of
of Gold
Gold
Exchanges
It is called a virtuous economic cycle or circle that drives
economic growth, prosperity and capital creation.
The Wealth Creation Feedback Effect
Innovation
Exchanges
This happens when the practice of innovation and
exchange (marketing) is unappreciated, depreciated ,
trivialized, misunderstood, mocked and disparaged.
The Wealth Creation Feedback Effect
Innovation
Exchanges
This happened in China three times in the 15th Century,
19th Century and 20th Century.
The Wealth of Nations
The Schumpeter-Smith feedback dynamic is latent in
all societies but every so often it becomes very
active in a lucky country. When this happens such
an economy and society shines brightly for a 100200 years or so. Examples are the Netherlands in the
1600s, Britain from 1780-1930, United States from
about the 1850s, Germany from the 1870s, Japan
from the early 1960s and South Korea in the 1980s.
Trading and Wealth Creation
Today China is experiencing the most powerful
Schumpeter-Smith wealth creation effect ever. It is
growing the economy of a billion plus people at
about an average of 10% a year, year after year.
And when Chinese domestic marketers become very
skilled at marketing in China they will apply these
new skills and their capital to global marketing.
And India will not be far behind. Whither the U.S.?
A Short Story Of Civilization
Trade and then trading Empires grew out of the production
of agricultural surpluses that could be traded and led to
the diffusion of all sorts of innovations.
A Short Story Of Civilization
If you click on the next 11 slides quickly you will see
the stars come to life. Click back 11 times quickly
and notice the red physical distribution trade links
and how they drive the bursts of prosperity and
civilization. Then proceed slowly through the 11
slides.
11,000 BC End of last ice-age. A more arid climate leads
nomadic hunters and gatherers to the cropping of wheat and
barley in Jordan. Villages, agriculture surpluses, labor
specialization, and trading are invented
6,000BC: The cultivation of rice is invented in China
After several thousand years the fertile crescent is farmed out and
tribes move on to greener pastures. The farming of rice expands
across South East Asia. Goats, sheep, cows, pigs and waterbuffalo are domesticated
3000BC: The first great trading civilizations are created along
great rivers. Moving cargo along rivers is 1/20th cost of moving
by camel or cart.
500 BC - 500 AD: Trading boats venture out into the
Mediterranean and South China Seas. Rome dominates other
great trading center Carthage, then Europe with its Roman Roads.
China dominates Asia. Overland trade begins between the superpowers.
Other great trading ports, cities and civilizations evolve.
500-1200 AD: The Western dark ages. Raiding dominates
trading. Some civilizations decline because of climate change,
others are destroyed by warrior tribes.
800-1300 AD: The Islamic “Enlightenment” restores trade in
Europe and with Asia. Mongols create Eurasian trading Empire.
1400-1700 AD: The emergence of the merchant adventurers of
Venice, Italy, Portugal, Spain, Holland and England. The trading
of slaves, spices, plants, precious metals and crafts dominates
using newly invented sailing ships.
1700-1800: The development of the Baltic States, Russia and
North America.
1900-2000: The steamship, container ship and air-cargo shrink
the world. The US, China, Japan, and Germany dominate.
Global Trading System Dynamics
New communication, transportation and quality
control innovations have greatly reduced
transaction costs associated with global sourcing
and it has led to a massive system dynamic that is
driving huge redeployments of capital, labor and
skills around the world.
The gains from trade are unequal, with the winners
being the economies with marketers (traders) who
respond to market forces fast and well.
Global Trading System Dynamics
Retailer/distributor “discovers” a new global source of supply.
Retailer/distributor develops a trading alliance
with new source.
If the net effect of shifting investment and
employment is a recession, then the
retailing/ distribution sector will react to
reduced sales by seeking more global
suppliers who will reduce cost of goods
sold. If they do not, competitors will, and
they will gain market share.
Employment in manufacturing sectors
exposed to fierce global price competition
shrinks. Sectors that are insulated, such as
health care, benefit from lower supply prices.
Other sectors that lead the world in
production and manufacturing innovation,
such as pharmaceuticals, aerospace, and
forest products, flourish.
New communication and transportation
technologies reduce transaction costs. Low
labor costs and quality and on-time delivery
assurance contracts make supplier attractive.
Domestic and global sources in existing trade
alliances come under pressure to innovate, to
reduce prices and increase services.
Domestic manufacturing output contracts as
profits are lowered by global competition.
Retailers and shareholders reinvest profits or
invest in manufacturing and services
insulated from global competition or leading
global competition. Demand increases
generally for all goods as a result of falling
prices (an income effect) and in particular for
the lower priced goods (a substitution effect).
Retailer/distributor profits increase and
or consumer prices drop in very pricecompetitive markets.
Global Trading System Dynamics
The World has greatly prospered :
World Trade
World GDP
2000
$8 trillion
$32 trillion
2007
$18 trillion
$52 trillion
Fortune Magazine, July 23, 2007
But the U.S. still dominates:
U.S.
GDP (% household consumption)
Japan
GDP
Germany GDP
China
GDP
2005
$9 trillion
$3.6 trillion
$2.2 trillion
$1.6 trillion
(70%)
(54%)
(57%)
(41%)
Global Trading System Dynamics
China and India are growing at 8-10% a year, the
U.S. at 3%. But its OK say the experts:
“It will take years of venture capital flowing in before
the Chinese let go of a rote approach to work and
truly embrace entrepreneurial innovation”
Jack and Suzy Welch Business Week, July 2, 2007, p. 112
The ex-CEO of GE and ex-Editor of the Harvard
Business Review are wrong. And we should be
scared of our own “rote” marketing practices.
Global Trading Implications
Our future prosperity depends on our companies and
entrepreneurs ever improving their marketing skills
(their innovation and diffusion of innovation), the
way they think about market dynamics and
understand the interaction of supply and demand.
Understanding Supply and Demand
A stable market, in stable equilibrium, is actually a
failed rather than a successful market.
Markets should always be getting more efficient,
introducing new technologies that creatively
destroy the status quo.
Markets are about change; about growth,
transformation, decline and fall, and not stability.
Markets are about disequilibrium and not
equilibrium.
Understanding Supply and Demand
Supply is always changing as product, production and
trading processes are constantly being tinkered
with by managers. This changes both the level and
variance of supply and demand.
Every so often a really major transforming
technology comes along that creates a whole new
product life-cycle. B/W TV - Color TV - HD Flatscreen TV; Videos –DVD; Portable cassette
players – MP3.
Understanding Supply and Demand
Buyers’ preferences and wants are always
being changed by changes in supply
The variation in supply
is constantly changing
The variation in demand
is constantly changing
Suppliers’ products and processes are
always being changed by changes in
demand
Understanding Supply and Demand
Every firm’s supply offering is always changing as
managers tweak product design processes,
production processes, distribution processes,
selling processes to lower costs and increase
consumers’ preferences for the product or service
offering. That is what managers are hired to do,
including managing the product life-cycle.
A Theory of Market Dynamics
Product Innovation Life-Cycle
Sales
When a new innovation is
introduced/launched the
variance in the supply
offering increases but
demand may not change
much. Sales of the new
innovation are low despite
a lot of effort teaching
potential consumers about
the advantage of the
innovation, changing their
preferences and changing
demand. The market is
fermenting. Sometimes
demand never takes off!
Introduction
Market fermenting
Growth
Market making
Maturity
Market equilibrium
Time
A Theory of Market Dynamics
Product Innovation Life-Cycle
Sales
But when demand does
take-off, supply has to
greatly increase to keep up
with demand. Imitators
enter the market with
“their” variation of the
product innovation and
supply but it is often
standardized around a
dominant design. Diffusion
of the new innovation
occurs through greatly
expanded distribution
reach. Advertising is about
competitive comparisons.
Profits are greatest. It is
happy times for most
suppliers.
Introduction
Market fermenting
Growth
Market making
Maturity
Market equilibrium
Time
A Theory of Market Dynamics
ZXKGBVQJ did not become the standard! What did?
A Theory of Market Dynamics
Product Innovation Life-Cycle
Sales
At the maturity stage there
is little product design
improvement and supply
does not appear to change
much. Market shares
stabilize around Brand
loyalty and the rate of
change in demand and
supply greatly decreases.
Price competition
increases, particularly as
suppliers innovate on
production process cost
reduction.
Introduction
Market fermenting
Growth
Market making
Maturity
Market equilibrium
Time
A Theory of Market Dynamics
Product Innovation Life-Cycle
Sales
Old product
Transformational
new product
Introduction
Market fermenting
Growth
Market making
Maturity
Market equilibrium
Then a market
transforming new
technology platform or
product design comes along
that kicks off a new
product innovation lifecycle. An example is the
invention of the manual
type-writer whose product
life-cycle lasted from about
1880-1960, its replacement
by the electric type-writer
whose life-cycle lasted from
1920-1990, its replacement
by the word-processor
whose life-cycle lasted from
1960-1990 and its
replacement by the PC
whose life-cycle started
around 1980 and continues.
Introduction
Market fermenting
Creative Destruction
Encyclopedia Britannica did not develop a CDROM version in late 1980s.
As a result it faced more fun competition at onetenth the price.
Sales and direct salesforce imploded.
Encyclopedia Britannica (owned by a charitable
foundation) had chance of creating a Britannica
CD-ROM in 1988.
Instead developed an interactive CD-ROM version
of Compton’s, its low end brand of
encyclopedia. In 1989 it was an instant hit.
Senior management did not want to change
customary selling process: salespeople faced
dramatic declines in commissions. So what did
they do?
Try to sell the books and CD together!
Then came Google and
Wikipedia! Massacre!
A Theory of Market Dynamics
A way of thinking a little deeper about the productlife-cycle is to see the market as constantly
changing, sometimes very rapidly, sometimes
much more slowly, in the following way.
A Theory of Market Dynamics
When a new innovation is introduced by a supplier
into the market, customer preferences change and
standards of quality change and demand changes.
Suppliers rush in to serve what they believe to be the
new demand. This creates imbalances of supply
and demand and increased competition in the old
market and new market.
A Theory of Market Dynamics
This way of marketing thinking about market
dynamics is illustrated in the following figure. It is
a superior way of thinking about product-life
cycles and is a superior way of thinking about
competition.
A Theory of Market Dynamics
Buyers’ preferences and wants are
always being changed by changes
in supply.
The economic
processes change the
economic structure
that changes the social
and political structure.
Sellers who
implement faster
are more
competitive.
The variation in
consumer demand is
constantly changing
The supply of products
and processes is
constantly changing
Supply will shift to
serve the demand of
the most profitable
market segments
Markets are always in
disequilibrium.
Competition increases
as supply exceeds
demand.
Effective products and
process are quickly
imitated and improved
Competition forces sellers
to try new ways of serving
customers and reducing
costs
Sellers with an
insatiable selfimprovement drive are
more competitive.
Sellers learn directly and by
observing other sellers how to
add customer and
shareholder value
Sellers with superior market
analysis skills that are listened to
are more competitive.
A Theory of Market Dynamics
This is the way that Cyrus McCormick thought. He was
driven, a great market analyst, and he was brilliant at
implementation. In theory and in practice, in
principle and process he was a marketing genius.
After reading his story you will understand the
importance of economic, political, technological, and
socio-cultural forces, and what marketing in practice
is about.
It is also a case study about company failure.
A Theory of Market Dynamics
Of FORTUNE magazine’s 100 biggest firms in1956,
only 25 were still on the list in 2006. Each year in
the U.S. 800,000 new companies are launched,
over 100,000 are taken over, 100,000 fail and
700,000 are terminated.
So why do some businesses die and some businesses
thrive? Some of it has to do with being lucky.
A lot depends on their processes. So how should we
think about processes?
Thinking About Competitive Processes
Economies are made up of chains of manufacturers
that each add value. It is called an added-value
supply chain.
Manufacturer A
Selling
Processes
Purchasing
Processes
Distribution
Processes
Supply
Processes
Service
Processes
Manufacturing
Processes
Selling
Processes
Distribution
Processes
Service
Processes
Manufacturer B
Purchasing
Processes
Supply
Processes
Manufacturer C
Manufacturing
Processes
Thinking About Competitive Processes
Organizations are designed around the flow of addedvalue processes and activities within the processes.
Marketing managers must understand this flow
from the inside-out and outside-in. But added-value
process analysis is not enough. It is too one
dimensional. It is too sequential. It needs to be
hierarchical as well as sequential.
Thinking About Competitive Processes
Learning processes
Benchmarking, training, process improvement techniques
Resource deployment processes
HR, R&D, budgeting and planning processes
System control processes
Customer satisfaction, quality, waste and cost control
Primary added-value processes
-supply-manufacturing-selling-distribution-service-
Firms have to have superior higher-order processes
that determine their primary added-value processes.
The Big Picture
American Business Schools must produce American
marketers with world-beating product innovation
and diffusion process thinking skills. If not our
future is dismal.
The Big Picture
That is why Marketing is the most important, most
exciting discipline taught in Business Schools.