Professor John M. McCann
Fuqua School of Business
Duke University
March 10, 1995
We are witnessing four revolutions, ones that Fortune Magazine (Thomas A. Stewart, "Welcome to the Revolution", December 13, 1993) calls inter-related.
However, my view is that there is one revolution that is driving all of these ... the so-called microcosm . It involves the development of the microprocessor and its spread into all forms of electronics, particularly personal computers. The spread of microprocessor-based technology is certainly a direct result of the microprocessor, as is the invention of the information age economy. These two revolutions have led to the other two: the globalization of markets and the dismantling of hierarchies.
So, I see a structure to all of this, with the microprocessor
creating the information age economy and the spread of the technologies,
and then these two revolutions dismantling hierarchies and globalizing
markets. However we look at these revolutions, we can see that
they have impacted marketing in consumer goods firms, and those
impacts are the subject of this paper.
These revolutions are an important part of our story because they are associated with the demise of mass marketing as the primary marketing philosophy of consumer goods firms. Let's look for a moment at the history of mass marketing so that we can understand its demise.
It all started a couple of centuries ago, with the industrial
revolution which gave us a declining cost curve: the more product
we made, the cheaper was each unit of that product. By manufacturing
a large number of identical items, a firm could spread the cost
of the factory over many units and could employ low-cost labor.
Thus it became economically feasible, perhaps even imperative,
to manufacture large quantities of a good at increasingly lower
costs. Given this supply of products, it was inevitable that mass
marketing would have been developed.
Mass marketing evolved slowly during the latter part of the 19th
century and the first half of the 20th century. But a big impetuous
came with the close of World War II in the form of pent-up demand,
a new road system, and a new set of electronic equipment.
During WW II, a large fraction of the men in the U.S. went into the service, and women replaced them in the factories that had shifted from producing consumer goods to producing planes, tanks, rifles, and the other war needs. The result was a full employment economy with small supplies of consumer items, thus producing a high savings rate (which was encouraged by the U.S. government as a means of paying for the war). When the war was over and the men returned home, there was high pent-up demand due to the large accumulated wealth.
The U.S. military was very impressed with the German highway system and put in place plans to develop a similar highway structure in the U.S. that would allow the military to move goods and people across the country if there were ever a war in the U.S. President Eisenhower, with support from the automobile and oil producers, brought us the Interstate Highway System and thus a new set of roads connecting cities to each other, and outlying areas to the center of those cities.
The needs of the military during the war led to major research and development efforts in electronics, along with large increases in our ability to mass produce electronic equipment such as televisions and radios.
With the foundations in place, the "mass" aspects of
marketing came into existence in the form of mass demand, massive
stores, and mass communications.
Mass demand logically followed the pent-up demand at the end of the war. Not only did people have wealth to spend, they quickly married and produced a "bumper crop" of babies ... the post-war baby boom that has influenced marketing ever since. The new roads led to suburbs and to the associated malls and large stores. The new electronic production capacity gave us inexpensive radio and affordable television.
With all of this structure in place, firms like Procter & Gamble saw that they could produce television shows that would feature advertising for their products and "talk to" the consumer in her own home. These "soap operas" put the manufacturers such as P&G into contact with millions of consumers, and resulted in a "power shift" away from the retailer (who had been the one who had contact with the consumer) and into the hands of the manufacturer.
Thus we had the creation of mass marketing. Associated with the practice of mass marketing is its management, which evolved to have a strong planning orientation and to be practiced at a central level. It became common for a company to organize its products into a hierarchy, with individual brands at the bottom. For instance, a company such as General Foods would have a coffee division, perhaps sub-divided into instant coffee and ground coffee groups. Each group would have multiple brands (e.g., Sanka, Brim, Maxwell House), and each brand have a manager, called the brand manager. This manager would be located in the corporate headquarters and would spend most of his/her time developing and executing annual brand plans.
Given the mass orientation of these businesses, these brand plans called for the marketing funds and efforts to be allocated to mass advertising, primarily television advertising. TV shows were "bought" for the entire year, and ads were developed and scheduled to run on those shows. Associated marketing efforts were devised, such as promotions and retailer programs, but the bulk of the effort was through the mass media.
These annual plans were difficult to develop because of the need to get approval from all levels of the product hierarchies. Thus the planning cycle could consumer 10-15 weeks of the brand managers time. Once they were approved, it was difficult to make changes. There was not a major need to make quick changes because the brand managers did not have a good intelligence system for providing timely and accurate market feedback. They would receive six reports a year on their retail sales and market share during the past two months. These reports would not arrive on their desks until at least a month after the period was over, thus making it very difficult to detect problems and devise solutions during the year. This analytical work tended to be postponed until the next planning cycle when time and resources were devoted to understanding what had happened to the brand during the past year.
We can now examine the basis for mass marketing ... the things that made it work. First, the market had to be large and homogeneous because there was one marketing plan for the entire market. Each consumer was treated to be identical to all the others.
Second, broadcast technology is the cornerstone of mass marketing because it provides the vehicle through which the firms can speak to their target markets. Third is the role played by a central hierarchy, through which a relatively small number of marketing managers could plan and execute market programs that generated millions of dollars in revenue. Finally, mass marketing was dependent upon a mass production economy in which 1) consumers were willing to buy the items that were identical, or at least very similar to, those of their neighbors, and 2) manufacturing facilities were geared to producing millions of these identical items.
But, alas, these conditions are coming unraveled in the new age. They were the foundation of the industrial era, but are being replaced in the information era by the four inter-related revolutions discussed above. Thus we can see that mass marketing is in trouble, and may not live out the century.
Globalization is highlighting the fact that there are many, many
markets that must be served, and thus globalization is destroying
the notion of a homogeneous market. Information technology and
networks are providing alternative means of getting information
and thus putting the broadcast technology industry into retreat.
Central hierarchies are being dismantled and replaced with networks
and other organizational forms. Finally, the mass production economy
is giving way to the information age economy.
Will mass marketing weather these storms? Let's look at how marketing is changing by examining some forces that are creating new marketing forms and formats.
This story starts with the microprocessor as the change agent.
It has given us robotics and other advanced manufacturing tools
that has led to new manufacturing concepts like just in time,
modular manufacturer, flexible manufacturing, etc. The result
has been the augmentation of mass production with other forms
of manufacturing that do not require the very large economies
of scale necessary with the old model. Thus we do not have to
have mass marketing simply because we have mass production.
Microprocessors have given us measuring instruments like UPC scanners, and these instruments have given us an explosion in the quantity and quality of marketing data. These data have made it possible to understand smaller and smaller markets, and to produce this understanding shortly after the marketing events have occurred. Thus the old annualized marketing concept can give way to much more flexible marketing program ... perhaps something we could call Just in Time Marketing.
Microprocessors have greatly increased our communications capabilities, and thus made it possible for managers in a central location to be in instant contact with retailers, sales representatives, brokers, etc. Satellites have greatly increased the media options and brought about a media environment that is often described as fragmented to denote the fact there are no longer a few major networks that reach the majority of the population. It is much more difficult to practice mass marketing in a fragmented media environment.
The new reality of consumer packaged goods marketing is depicted in the following diagram.
The entities in this market are the manufacturers, the retailers
(with their warehouses, headquarters, and retail stores), and
the consumers. Physical goods flow from the manufacturers to the
warehouse, to the retail stores, and finally into the consumers
shopping carts. Manufacturers try to influence this flow of goods
via marketing programs aimed at the retailers and at the consumers.
They impact retailers via sales calls, business reviews, deal
offers, price changes, suggested shelf arrangement, and new items.
In addition, some of them provide merchandising support to the
retail stores. In return, these manufacturers want to retailers
to provide good prices to the consumers, along with big promotional
displays, large shelf areas, big and frequent advertising features,
and special retail coupons. Manufacturers also work to impact
consumers directly through promotions and advertising.
We can see from this diagram that the manufacturers have two ways
to influence consumers: directly or indirectly via the retailer.
In the mass marketing era, they took the direct route, at least
most of the time. Most of their marketing budgets went into consumer
advertising, with consumer promotions getting the next largest
chunk, followed by retailer promotional efforts. A common rule
of thumb was 60/20/20 ... 60% for advertising, 20% for consumer
promotions, and 20% for retailer promotions.
This world evolved over time, as described in the pieced titled Death Wish Marketing. It changed as the funds were shifted from the direct to the indirect path ... from the consumer to the retailer. By the end of the 1980s, a new rule of thumb was in place; the 40/60 rule ... 40% of the marketing budget directed towards the consumer and 60% of it towards the retailer. This was pretty much a reversal of the old rule, and it proved to be more difficult to implement. In a mass marketing environment of broadcast advertising, the firm gives their money to the ad agency, who takes 15% off the top and gives the rest to the major television networks. This is not very labor intensive and thus easy for a centralized marketing group to implement.
The money that flowed to the retailer was given to the sales force, who disbursed it to their customers. Since there was not a lot of money to give to the retailers, this activity was again easy to manage. But when the bulk of the money started flowing through the sales force, it became evident that a small, centralized marketing group could not adequately analyze, plan, and execute the retailer-oriented programs. Thus, the mass marketing model would had to give way ... the center would not hold.
All of these factors have led to change in the practice of marketing as well as the organization of the marketing functions ... to the demassification of marketing.
We can see that marketing can now be described by five words,
all of which begin with the letter d. Marketing is no longer
centralized in the hands of a few managers ... the brand managers.
It is now distributed across different parts of the organization,
with the sales force playing a major marketing role. Thus marketing
is now diffused throughout the organization, with the old central
hierarchy giving way. Not only have funds flowed away from mass
advertising to the retailers, they has gone into programs that
speak directly to the consumers. This direct for of marketing
has been made possible by the availability of large consumer databases.
Thus we can see that mass marketing has given way to new marketing forms: distributed, diffused, decentralized, direct, and database.
Diffused Marketing
When one group, the "official" marketing group loses its centralized control over marketing, the marketing activities do not go away or disappear, they move to other parts of the firm ... they become diffused within (and sometimes outside) the firm.
Centralized marketing, i.e., brand management, has given way to
other forms and formats. Trade marketing departments came into
existence in the late 1980s and early 1990s to handle to marketing
programs being designed for the retail trade. Some firms have
formed regional marketing structures to make sure that the firm's
programs are tailored to the unique needs of each region. Account
management got a big boast with the success of the Wal-Mart/P&G
collaboration where a team of P&G people were assigned to
work directly with Wal-Mart to optimize the interfaces between
the two firms. This success story has led other firms to follow
suit. Finally, direct marketing is the fastest growing part of
marketing in the early 1990s, and has taken its place alongside
other marketing forms in CPG firms.
To accommodate the increasingly diffused nature of marketing, firms have been reorganizing and inventing new department structures.
The typical organizational form had a President at the top, with several Vice Presidents below. It was very common to assign marketing to one VP and sales to another VP. In this structure, the marketing managers devised strategies, plans, programs, and event, and the sales force implemented those aspects of these events that involved retailers. It was difficult for the marketing and sales managers to interact; in some firms it was forbidden.
As mass marketing lost its total dominance and trade marketing
rose in importance, it became common to put the two groups together,
at least at the top via the establishment of a Vice President
of Sales and Marketing. This change at the top was soon followed
by changes in the ranks with the establishments of departments
that coincided with the diffused aspects of marketing: mass, direct,
account management, and trade.
Organizational changes are never over, and we will be seeing new structures as the business evolves.
One area of the business will need a lot of attention: store service. Today, most CPG firms have little direct contact with retail stores, and this lack of contact is evident to the retail trade executives. There seems to be general agreement among retail executives that CPG firms do a lousy job servicing stores.
The tendency of CPG firms to ignore stores and concentrate on the buying offices may change because the scanner data, which most firms use to manage their retail businesses, is changing. As the 1990s came around, it was common for most CPG firms to purchase market-level data. But during the 1990s, the data vendors began offering account-level data, and the firms started to buy the data. Whereas it used to only be possible to understand the business at the market level, e.g., at the Raleigh/Durham level, the marketing and sales managers could understand what was driving their businesses at the account/market level. For example, they could understand what was driving their business in Krogers, Food Lion, and Harris Teeter in the Raleigh/Durham market.
The issues, opportunities, and problems that flow from the ability to understand and influence individual stores is pursued in the document titled Scanner Marketing.