Drucker on Marketing - Key Points

Whenever you see a successful business, someone once made a courageous decision.

The purpose of business is to create and keep a customer.

Business has only two functions — marketing and innovation. If marketing was done perfectly, selling would be unnecessary.

If you want something new, you have to stop doing something old.

There is nothing quite so useless, as doing with great efficiency, something that should not be done at all.

People in any organization are always attached to the obsolete - the things that should have worked but did not, the things that once were productive and no longer are.

Results are obtained by exploiting opportunities, not by solving problems.

People who don't take risks generally make about two big mistakes a year. People who do take risks generally make about two big mistakes a year.

The aim of marketing is to know and understand the customer so well the product or service fits him and sells itself.

The best way to predict your future is to create it.

The philosophy of bringing all departments together with the objective of satisfying their customers’ needs was incorporated into the very heart of marketing in what has been termed “the marketing concept”.

Creation of a customer and not profit that is the basic purpose of business. It would be disastrous to somehow overlook profit as a business necessity. Profit is not the purpose of business and that the concept of profit maximization is not only meaningless but dangerous. You must ensure profitability, but not necessarily profit maximization. Profit supplies the business with energy by supporting its two basic functions: marketing and innovation.

You can’t get “there” until you know where “there” is.

Most effective way to manage change is to create it yourself.

The most important thing in communication is hearing what isn’t said.

Quality as a feature defined wholly by the customer, not supplier. It is foolish for the seller to spend money, time, and effort in developing quality as he sees it if the buyer does not have the same definition.

The goal of the organization must come first, and everything must be done to support this goal as long as it is done with integrity.

References:
Drucker on Marketing - by William A. Cohen

Drucker on Marketing - My Chapter Notes

Drucker on Marketing - by William A. Cohen

CH-1: Two Different Views on the Development of Marketing

Eras of marketing development:

Ø  Simple Trade Era – Barter system – exchanging their goods or services to obtain the goods or services that they require.

Ø  Production Era – Emphasis shifted to reducing the cost of production.

Ø  Selling Era – Market shifted to getting customers to buy what had been produced.

Ø  Marketing Era – Ability to discover what the customer wanted before the product was developed.

Selling was persuading someone to buy something that you had and wanted to sell while marketing was having something that a prospect already wanted to buy. Drucker concluded that if marketing was done perfectly, selling would be unnecessary.

Ø  Marketing Company Era – All business depends on only two functions: marketing & innovation. This product innovation is itself an integral part of marketing.

The philosophy of bringing all departments together with the objective of satisfying their customers’ needs was incorporated into the very heart of marketing in what has been termed “the marketing concept”.

Ø  Societal Marketing Era – Corporations should recognize societal benefit as an important goal and that they should not lie or steal from society in the interest of selling a product.

Drucker reasoned creation of a customer and not profit that is the basic purpose of business. It would be disastrous to somehow overlook profit as a business necessity.

Examples: Mitsui, Sears Roebuck, Marks & Spencer, Cadillac, Rolls Royce – marketed products

Management not only had to find, identify, and market taking forces of the market into account, but to manipulate these forces. Successful marketer did what was required to ethically supply society with what was wanted and needed.

CH-2: The Purpose of Business Is Not to Make a Profit

Drucker says profit is not the purpose of business and that the concept of profit maximization is not only meaningless but dangerous. You must ensure profitability, but not necessarily profit maximization.

The profit motive, expressed as compensation, isn’t necessarily the prime motivator for normal, not necessarily altruistic, employees.

Profits are the most dangerous disease of an industrial society – says Drucker. Profit and profitability are absolute requirements. Optimal profit rather than profit maximization. A business making profit (as opposed to profit maximization) even more important for society than for the individual business.

 The achievement of sufficient profit to allow for the risk of the financial activity of the business, thus to avoid catastrophic loss leading to failure. Profit supplies the business with energy by supporting its two basic functions: marketing and innovation. Only a business action can create a customer, and that means innovation, advertising, selling skill, strategy, service, you name it. These business actions cost money that comes from the difference between buying low and selling at a higher amount. [Ex: Starbucks pg.17]

Drucker wrote “The customer is the foundation of a business and keeps it in existence. He alone gives employment. To supply the wants and needs of a consumer, society entrusts wealth-producing resources to the business enterprise.”

CH-3: Any Organization Has Only Two Functions

Marketing and innovation produce results; all the rest are costs.

Drucker frequently tells us what to do, but not how to do it.

If any business continued to do what made it successful in the past, it would ultimately fail.

Profit was not the whole responsibility of a business, but it was the first. Business’s purpose was to create a highly satisfied consumer or user of whatever the product or service is.

Marketing Mix: 4P’s – Product, Price, Promotion, and Place.

Successful selling of the wrong product or the right product to the wrong market results in misallocation of scarce company resources, even if the selling is successful.

For top managers it means organizing and motivating the organization toward these two functions, marketing and innovation, regardless of their functional area or responsibilities.

CH-4: Drucker’s Marketing View

Marketing in an organization is everybody’s business, certainly everybody who has anything to do with the customer. Concern and responsibility for marketing must therefore permeate all areas of the enterprise. 5 important questions to ask about your organization:

1.       What is our mission?

2.       What is our customer?

3.       What does our customer value?

4.       What are our results?

5.       What is our plan?

Implementing Drucker’s Marketing View:

1.       Market marketing to all internal organizations at all levels

2.       Understand the difference between sales and marketing

3.       Educate and lead

4.       Approach the business from the customer’s point of view

Selling focuses on the needs of the seller and the need to convert product to cash, while marketing focuses on the needs of the buyer and the need to satisfy the customer through the products produced.

Research on leadership shows that you can lead from any level.

(Ex: University of Phoenix – approach the business from customer’s POV)

CH-5: Marketing Is Leadership

Good leadership is essentially marketing. Drucker called leadership a “marketing job”.

In no other type of leadership must the leader make decisions based on less or less reliable information.

Leadership Principles:

1.       Maintain absolute integrity: If you say something, make sure it is the truth. If you later realize that you have misspoken, correct yourself. If you say or promise you will do something, make certain you do it, no matter what. [Ex: Roberts CEO of Radioshack]

2.       Know your stuff [Ex: Bill Gates]

3.       Declare your expectations [Ex: Obama] – You can’t get “there” until you know where “there” is.

4.       Show uncommon commitment [Ex: Michael Dell]

5.       Expect positive results [Ex: Betsy Burton, CEO of Supercuts]

6.       Take care of your people

7.       Put duty before self: Your employees and customers are rarely impressed by your compensation, the expensive car you drive, or the perks of your position

8.       Get out in front [Ex: Beth Pritchard, CEO of Bed, Bath & Beyond]

CH-6: Where Do Best Innovations Come From

Staying ahead of competition was critical for all organizations and that innovation was the key to success.

Bright ideas are the riskiest and least successful source of innovative opportunities. Drucker recommended that we avoid the bright idea at all costs. [Some bright ideas that worked: Zipper, Ballpoint Pen, Aerosol Spray etc.]

Where do best innovations come from?

1.       The unexpected was the richest source of opportunity for successful innovation [Ex: Eastman Kodak’s powerful bonding agent Super Glue]

2.       The incongruities – One expects a certain result, but instead opposite occurs. [Ex: Starbucks, IBM]

3.       Process Need – Necessity is the mother of invention. [Ex: Wright brothers]

4.       Industry and Market Structures – [Ex: Ford, Rolls-Royce]

5.       Demographics – Characteristics of human population (education, culture, income, etc.) are not static and change over time.

6.       Changes to Perception – Your mood, values, beliefs, or what you see or “know” previously can all affect the perception [Ex – ripped jeans]

7.       New Knowledge – It frequently takes years, sometimes decades or longer before new knowledge is applied in a way that results in innovations [Ex – Alexander Fleming’s Penicillin]

We should approach innovation to build and maintain the success of our organizations with the best sources of new ideas.

CH-7: Demand Side Innovation

There are two general types of innovation. Demand-side innovation involves purposefully working towards a pre-determined goal. The goal results from a need evidenced by the situation. It could be a difficulty, a need in the market, a problem that requires solving, or something else. Something demands a solution, and frequently this solution involves innovation – something new and different. Supply-side innovation on the other hand is innovation based primarily on capability in which the originally intended objective becomes secondary to actual, and usually unexpected, results.

Innovation goals for the typical business are split into 5 classes:

1)      New products and services required to reach marketing objectives

2)      New products and services needed because of technological developments making current products or services obsolete

3)      Product improvements needed to reach marketing objectives or resulting from anticipated technological developments

4)      New processes and improvements required in old processes to meet market goals

5)      Innovation and improvements in all other supporting areas of business

Reaching innovation goals require a systematic routine. Drucker called this routine the practice of innovation. The practice of demand-side innovation requires analysis, a system, and hard work.

Drucker claimed that it was not his knowledge about a particular industry, but rather his ignorance that generally led to success. (Ex: Ghost fleet – shipbuilding for british – pg.65)

The left-brain approach involves defining the problem, deciding on the relevant information bearing on the situation, developing potential alternative solutions whether they involve an innovation or not, analyzing these alternatives, developing the best innovation of solution from this analysis, and finally making the decision to adopt the innovation or solution of choice.

You can’t get “there” until you know where “there” is.

The right-brain approach to problem solving still works by starting out with an assumption of ignorance, and it is still systematic and uses no conscious, fixed sequence of logical steps to arrive at the solution. (Ex: Thomas Edison – light bulb; Albert Einstein)

Dos of systematic innovation:

1)      Begin this process by an analysis of your opportunities; don’t dwell on your limitations

2)      Look, ask, and listen: Look at numbers, but also look at people.

3)      Keep it simple: Your innovation should overcome only one challenge at a time.

4)      Start small, not big: Think little money, few people, and a limited market.

5)      Aim at leadership: If innovation doesn’t aim at leadership from the start, it is unlikely to go anywhere

Don’ts of systematic innovation:

1)      Don’t be clever. Keep it Simple, Stupid.

2)      Don’t try to come up with too many innovations at once.

3)      Don’t try to innovate for the future. Innovate for the present. Innovation must have some sort of advantage from the beginning.

CH-8: Supply Side Innovation

Supply-side innovation involves finding a use for a great product that had no purpose. (Ex: Silly Putty)

What to do about unexpected results:

Management must look at every unexpected success and ask 4 questions:

1)      What would it mean to us if we exploited it?

2)      Where could it lead us?

3)      What would we have to do to convert it to an opportunity?

4)      How can we do it?

What to do about unexpected failure or an unexpected outside event? (Ex: Ford Edsel failure led to Thunderbird, Cossman Ant Farm, and Potato Gun)

CH-9: Drucker’s Entrepreneurial Marketing

Entrepreneurship concerns transferring innovations into economic goods and services.

Drucker organized his systematic entrepreneurial marketing strategies into 4 general approaches:

1)      Dominance of a new market or industry

2)      Development of a currently un-served market

3)      Finding and occupying a specialized “ecological niche”

4)      Changing the economic characteristics of a product, a market, or an industry

CH-10: The Best Way to Predict the Future Is to Create It

Company’s plan for creating the future had to incorporate the answers to 4 questions:

1)      What opportunities does the company want to pursue, and what risks is it willing and able to accept?

2)      What are the scope and structure of the organization’s strategy, including the right balance among such aspects as specialization, diversification, and integration?

3)      What are considered acceptable trade-offs for a company between time and money and between in-house execution and using a merger, acquisition, JV, or some external means to reach its objectives and attain its goals?

4)      What is the organizational structure appropriate to the company’s economic realities, the opportunities, and it performance expectations?

[Ex: Obama in 2008 elections]

CH-11: The Fundamental Marketing Decision

Determine the real business of an organization: “To think through and define the specific purpose and mission of the institution, whether business enterprise, hospital, or university.” Drucker saw this as a basic responsibility of any manager of any business.

Determining what business you are in is the top rung in creating a marketing organization’s future. Accurately defining your business will automatically save time, money, and resources on aspects that might detract rather than add value to what you are doing. At the same time it will help you to focus on those opportunities and possibilities that are important for success. Until you decide what business you are in, your organization will drift, no matter how effective or imaginative a marketer you are.

Showing Uncommon Commitment: It proves that the goal is worthwhile and really important and it proves that the leader isn’t going to quit.

“The failure of many is because they show no commitment, or commitment to the wrong goals. Commitment comes from a worthy mission and then strong commitment.”

We work hard, take great risks, and let nothing stop us only when a big, important goal is involved. People don’t generally exert themselves very much for small, unimportant goals. Others won’t follow you if they think that your commitment is temporary or that you may quit the goal

Three forces on which commitment is built: Physical – actual physical strength, Mental – knowledge or intelligence, and the Moral – attitudinal or spiritual values. The highest combination of these three forces acting as one force is the commitment.

5 proven techniques that will help you apply commitment to marketing:

1)      Think through your goals until they are clear and definite

2)      Make a public commitment

3)      Promote your goals and objectives

4)      Expect and deal with the dragons

5)      Adjust your marketing strategy and tactics but not your objectives (Ex: Qualcomm CDMA)

What a business thinks it produces is not of first importance – especially not to the future of the business and to its success. What a customer thinks he is buying, what he considers “value”, is decisive – it determines what a business is, what it produces and whether it will prosper.

CH-12: Drucker’s New Certainties for Formulating Marketing Strategy

The purpose of strategy is to enable an organization to achieve its desired results in an unpredictable environment (unknown and unforeseen).

CH-13: Success by Abandonment of Profitable Products

The abandonment of a successful product at the right time is a necessity whether the product was “already correct” or not. (Ex: Henry Ford’s Model-T, GM’s Jack Welch)

An organization must be prepared to abandon everything it does at the same time that it must devote itself to creating the new, so abandonment must simultaneously be executed along with continuous improvement, exploitation of past successes, and innovation.

Every 3 years, an organization should challenge every product, every service, every policy, every distribution channel with the question, if we were not in it already, would we be doing it now?

Abandonment is also necessary to render an “existing business entrepreneurial”; that is, “to work today on the products, services, processes, and technologies that will make a difference tomorrow.” Abandonment even facilitates change management since the most effective way to manage change is to create it yourself.

In maturity stages a phenomenon occurs in which profits begin to decline even while sales continue to increase. This is the result of increased competition and other factors. It is then that marketing executives need to think seriously about abandoning a formerly successful product.

CH-14: Marketing and Selling Are Not Complementary and May Be Adversarial

Strategic Variables: 4P’s of Marketing Mix: Product, Price, Promotion, and Place.

The most important thing in communication is hearing what isn’t said.

“Business is like war in on respect – if it’s grand strategy is correct, any number of tactical errors can be made, and yet the enterprise proves successful.” Unfortunately, the reverse is not true. If the tactics are correct, they can’t make an erroneous strategy successful.

It is a mistaken notion that good selling can overcome poor marketing.

CH-15: How to Do Marketing Research the Drucker Way

Marketing Research 101:

1)      If it’s not yet on the market, don’t do the market research: People don’t understand much if they can’t see and put their hands on the something. They can’t appreciate what you are talking about. This makes it rather difficult to know the likely reception for something before it is released to the market and it is seen and used.

2)      Expert opinion is of limited value.

3)      You must understand the risks and the importance of the test of reality. (Ex: Chrysler Convertible Car)

4)      It’s the customer that defines the product or service.

5)      There are three kinds of information that all researchers need: Inside, across organizations – partnerships and alliances, and External. Researching potential customers is extremely important.

6)      You need to know what to emphasize when researching the customer: researching indirect competition may be far more important than researching your direct competitor (Ex: typewriter vs. computer).

CH-16: Exploiting Demographic Change

Population change alone is perhaps the most important factor that a marketer can analyze to accurately predict the markets and market behaviors of the future.

CH-17: Timing Isn’t Everything; It’s the Only Thing

There are two major challenges in timing that are unique to management:

1)      The time of development was lengthening. This meant that by the time a product or service could be introduced, it might be obsolete because of other ongoing developments. (Ex: FedEx’s Zap Mail)

2)      Marketers must always make decisions considering not just the present but must simultaneously consider the impact of their actions on the future of the organization.

Doing the right thing at the wrong time is wrong. (Ex: Webvan)

Entrepreneurial Judo was Drucker’s name for the catapulting of a company into a leadership position in an industry against the efforts of entrenched established companies by sidestepping their strength (Ex: Bell Labs vs. Sony in transistor radio).

CH-18: How to Avoid Major Failure

Drucker believed that if you continue to do what made you successful in the past, you will eventually fail.

CH-19: Drucker’s Five Deadly Marketing Sins

1)      Seeking high profit margins and premium pricing (Ex: Xerox)

2)      Charging what the market will bear (Ex: DuPont’s synthetic fiber)

3)      Using cost-driven pricing: Cost driven pricing means that you simply add up all your costs, then add a profit, and there you are – the price you should charge. Drucker says you need to do “Price driven costing”. Start with the right price and work your way backwards to determine your allowable costs.

4)      Focusing on past winners: Slaughtering tomorrow’s opportunity on the altar of yesterday.

5)      Giving problems priority over opportunities: Many companies put their best performing people to work solving old problems with products in decline. Meanwhile opportunities were frequently assigned to those who lacked experience or ability.

CH-20: The Only Way to Set a Price

Price can be successfully set only by first determining its relative importance to the customer.

The marketer must start with price and what customer wants to buy rather than what the supplier wants to sell.

How we can connect the price to what the customer sees as value:

1)      The utility; that is, efficacy, convenience, usefulness, and so on as seen by the customer

2)      The kind of product that the customer buys

3)      The customers’ realities as they see it

4)      What the customers value

You had to start with the right price first and then work to come up with the right costs.

Experience Curve: The idea is that the more times a task will be performed, the more we learn about doing the task, and many elements such as costs are reduced in the process.

To assign correct price, one must look at prospective customers and how they see the product or service in the context of the market. Once one has the price, it is only prudent to look at costs to ensure that the product can be sold profitably.

CH-21: Quality According to Drucker

Quality as a feature defined wholly by the customer, not supplier.

Customers pay only for what they can use and what gives value to them.

It is foolish for the seller to spend money, time, and effort in developing quality as he sees it if the buyer does not have the same definition.

(Ex: inner city public schools vs. private schools – Private school defined the task of the teacher as “enabling those who want to learn, to learn”. Prestige schools teach success, others teach survival)

Quality requires 2 different lenses. One way is through the eyes of our customer. Only our customers can define what quality is. Once we get that right, we can proceed to measure performance and productivity in that area. This in turn will help us to build quality into our output at very beginning, when we design our product and service.

CH-22: Integrity Is Critical to Marketing

Integrity means adherence to a moral code and has to do with adherence to standards of ethics and doing “the right thing.” (Ex: J&J pulling Tylenol)

It would be socially irresponsible and most certainly unethical if a business did not show a profit at least equal to the cost of capital because failing to do so would waste society’s resources.

Confucian Ethics: The rules are same for all, but there are different general rules that vary according to 5 relationships based on interdependence: Superior & Subordinate, Father & Child, Husband & Wife, Oldest Brother & Sibling, and Friend & Friend. The right behavior in each case differs in order to optimize the benefits to the both parties in each relationship.

Lack of integrity will not be forgiven. Maintaining your integrity may cost you, but it is worth it. Be true to yourself and to your values and beliefs.

CH-23: Dangers of Marketing Professionalism

Story of 3 stone cutters: These three workers were approached and asked what they were doing. The first answered: “I’m earning a living by cutting stone.” The second one responded: “I’m a stonecutting professional. I’m doing the best job of cutting stone of anyone in my profession.” The third stonecutter had a visionary look on his face as he replied, “I’m building a cathedral.”

Anyone proclaiming technical proficiency or professionalism as his primary goal will not put the goals or the mission of the organization first. Drucker equated this with the “gun for hire” manager who would go anywhere and do anything, not for the customer or the organization’s goals, but because he considered his first allegiance to his achieving “top gun” rank with the status, and perks. While good skills should always be encouraged, it must always be related to the needs of the whole organization and especially to the organization’s mission.

The goal of the organization must come first, and everything must be done to support this goal as long as it is done with integrity.

Success comes from doing what is expected of you and then some.

CH-24: Why Buying Customers Won’t Work

CH-25: With Drucker into the Future

Drucker’s major accomplishments (per John Byrne)

1)      Introduced the idea of decentralization

2)      Workers should be treated on the asset side of ledger and not listed as liabilities.

3)      Corporation needed to be considered a community built on trust and respect, and not just a machine for profit maximization.

4)      Since there was no business without a customer, the purpose of a business was not profit at all, but to create a customer.

5)      Knowledge Workers – How knowledge would be of importance above other corporate inputs to productivity.

6)      First to state the marketing concept of creating value to customers.

7)      Age of societal marketing including corporate social responsibility, consumerism, marketing of nonprofit enterprises.

8)      Warning to beware of growth for growth’s sake and reminded that “Business enterprise is an entrepreneurial institution”

Drucker never stressed how to do things. Rather he suggested what to do and had us work thought the details of how to get them done on our own.