December 2008

IN THIS ISSUE

A Letter from CEO Michael Dunn

Just when you think it’s going to start to be safe out there, the market has yet another bad day. Another business icon falters. Another dismal government report points to a deepening downturn.

Call me crazy, but I think these are incredibly interesting times. And while the risks are high, the businesses that figure out how to be smarter in how they reach and differentiate themselves with customers are going to land in the proverbial catbird’s seat.

This issue of Prophet’s newsletter features a lineup of articles designed to help you survive the storm. In “Making Marketing Smarter Amidst the Cuts,” Partners Fred Geyer and Chiaki Nishino offer up five tough questions to consider so your business isn’t burned while budgets are slashed. David Aaker looks at “Three Priorities for Marketing in a Recession.”

In “Can Detroit Make Car Buyers Care Again?” Andrew Pierce takes a fresh look at brand strategy imperatives for U.S. automakers in the midst of bailout talks. And finally, we conduct an interview with Senior Partner Peter Dixon on new ways of thinking in grappling with business issues in “Dixon on Problem Solving – Bad Times or Good.”

Best wishes for the holidays and a new year that defies the prognosticators!

Best,

[Signed, Michael Dunn]

Michael Dunn
CEO & Chairman
m_dunn@prophet.com

Making Marketing Smarter Amidst the Cuts

By Fred Geyer and Chiaki Nishino

The troubled economy is forcing corporate leaders to re-evaluate their spending plans across the board; and marketing is often first in line for cuts as corporate leaders attempt to identify immediate cost reductions that may take longer to achieve in other areas. The challenge is slashing without burning. Addressing these five tough questions will help leaders determine how best to reduce and reallocate their budgets.

  1. Do you have a complete inventory of your growth investments and can you identify waste (or inefficient spend)? We’ve found that periodically taking an investment inventory will reveal wasteful spending of about 15% of the total almost every time, along with proven winners that must be supported no matter how much the budget must be reduced. A thorough inventory will identify obvious wastes and clear producers, as well as spending areas that pose bottom line opportunities for more efficient and effective spending.
  2. Do your investments change your customers’ buying behavior? Share of market and revenue goals are too general to be true barometers of effectiveness. It’s more important to know what behaviors you are trying to drive among specific groups of customers. For one group of customers, it may be driving an annual, versus bi-annual, service package upgrade. For another, it may involve methods to get them to buy 50 percent more each time they order. If you’ve identified growth-generating behaviors, you can judge your marketing investments by their ability to drive those behaviors.
  3. Are your investments focused on customers’ barriers to buying your brand? We helped a large financial services company make huge marketing effectiveness strides by turning its geographic spending pattern inside out. In well-developed markets, it spent heavily on mass advertising to build awareness – efficient if examining the cost divided by the number of prospects. But the brand was already well known; a better course appeared to be spending on closing the sale – a shift that actually doubled growth. Conversely, in low share markets, this client spent on closing the sale because of advertising’s cost. In fact, in low-share markets, it first needed to bump awareness and consideration to higher levels – for which mass advertising worked best. The lesson: Don’t let numerical efficiencies determine spending. It's better to understand barriers to growth and choose the marketing vehicles and messages that will overcome them.
  4. Do you have the right mix of marketing levers among your investments? All marketing investments do at least one of three things: Change customer perceptions to encourage them to buy more; provide temporary monetary incentives for customers to buy more; make the brand more available so customers can buy more. Focusing too heavily on any one lever can hurt the others. Instead, thinking has to shift to better weigh the right mix of investments to generate profitable growth.
  5. Do you have a system to maintain “winners” and cut “losers”? As you assess your winning and losing investments, it’s critical to think about both the potential long-term and short-term impacts of those decisions. Four considerations should guide this evaluation: effectiveness and efficiency; maintenance versus growth; proven versus experimental; direct and indirect impact.

Budget cutting and planning for an economic downturn are challenging, but can provide an opportunity for inserting greater rigor, and better capabilities and metrics to make marketing investments more effective in the long run. Actively assessing your marketing practices along the lines of these critical five questions will launch you down the path to greater marketing accountability with spending that better bridges the gaps between effectiveness and efficiency – whatever the economy is doing.

Fred Geyer and Chiaki Nishino are partners at Prophet. They can be reached at fgeyer@prophet.com and cnishino@prophet.com. An expanded version of this article can be found here.

Three Priorities for Marketing In a Recession

By David Aaker

In tough economic times, most firms experience stress, and marketing budgets are particularly vulnerable. It is a time of retrenchment and focus on short-term results, if not survival. In this climate, three priorities should help avoid missed opportunities and irreversible mistakes.

Look for Opportunities to Gain Market Position

The normal reaction to financial stress is to reduce budgets across the firm and to reduce the marketing budget the most because it is assumed that marketing is an investment that can be deferred without short-term impact. However, being defensive is not always the optimal direction. A rare chance to change the competitive landscape creating a stronger position should not be ignored or dismissed.

Since the early 1920s, there have been extensive efforts with a variety of models and methods to study the impact of marketing budgets during recessions. The results of dozens of studies have had a remarkably consistent finding. There is a strong correlation between the marketing budget during a recession and the performance of the business both during and in the years after the recession. Those firms that increased or even maintained their budget enjoyed more success, on average, than those that did not.

It is not clear how much influence the budget decision had on the outcome. Some of the correlation is spurious—weak businesses may have reduced marketing by necessity and might have experienced weak performance even if they had increased marketing. Nevertheless, this extensive data coupled with many case studies strongly suggest that some firms should consider being aggressive rather than defensive. What types of firms are likely to fall into that category? They would include those that:

  • Can be positioned as a value brand. Wal-Mart in the recession of ‘91 and ‘92 aggressively told their value story and as a result took share away from Sears, a share gain that was never relinquished. 
  • Enjoy an offering that has points of relevant superiority. Merrill Lynch took share away from Bear Sterns by increasing marketing in a recession telling a story which was based on real substance.
  • Have a new product that is changing the industry or affecting the firm’s competitive position--Starbuck’s launched a new interior to enhance their in-store experience in a recession.
  • Have a particularly effective marketing program. Intel Inside, perhaps the most successful marketing program in the high tech space was launched in the 1991 recession.
  • Have a balance sheet advantage over rivals—when competitors are unable to respond, the chances of improving market position with aggressive marketing increases. Consider, for example, Zurich Financial and Charles Schwab that today have financial strength superiority compared to some of their main competitors. 

It is too simplistic to recommend increasing the marketing budget to gain position. Relevant substance is needed to make the investment of precious resources worthwhile. So the challenge is to create or exploit a situation involving a product, position, or program to gain market position.

Upgrade Marketing Programs

Especially in tough economic times, marketing needs to elevate its game to move beyond competence to excellence. This means marketing programs that are mediocre or worse need to be identified and no longer funded. Wasting money on ineffective marketing is simply too costly. A budget reduction can represent an opportunity to overcome the organizational resistance to reduce budgets in those areas where the return is low.

Upgrading marketing also means creating or enhancing programs that work - that are obtaining superior returns. In many cases, how a budget is spent can be up to four times more important than how much is spent. When budgets become tight, the challenge of creating home run programs needs to be a priority. Easier said than done, of course.  

Three suggestions. First, make sure there is a free flow of ideas throughout the organization and beyond by enabling creative organizational people and units. Second, adjust the organization so that great ideas are recognized and tested and do not sit on the shelf unrecognized or untried. Third, look to the cost as well as the impact side. One route is to share marketing over product and county silos and with other firms. The result can be a program with a fraction of the cost of a go-it-yourself route. The partnership of United Airlines and FedEx to send luggage to a destination to allow travelers to fly without carry-on is an example. Another is to try alternative media to lead the program. What may be too costly with mass media may work with an Internet-based program.

The cornerstone of upgrading marketing is a data-driven process of measuring marketing effectiveness, so that budget allocation decisions can be made objectively. This process needs to include ongoing experimentation whereby marketing programs and their variants are tried out in the marketplace. Though difficult, it is also imperative to measure the long-term effect of marketing so that programs that drive sales in the near term, but damage the brand do not dominate. The fact is that some marketing efforts have been shown to have effects only with a two and three year delay. Surrogates for long-term health of the business such as the size and loyalty level of the loyal segment (and perhaps the very loyal segment as well) or brand health indicators such as image, differentiation, and energy of the brand can help. 

Protect the Brand

The brand is the asset that will not only support the business during tough times but it is also the key to future strategic success. There is a serious danger that the market will evolve toward a commodity because all brands will be emphasizing value and attributes. Brand protection starts with making sure that there is a brand vision that everyone in the organization understands and buys into. The brand vision needs to be accompanied with a system that makes sure that off-brand programs and activities do not occur. 

It is important to find ways to communicate value, often a necessity during tough economic times, without hurting the brand. Shouting price and deals is the wrong course because it announces that the brand is not worth the price. One way is to divert attention to value subbrands such as the BMW 1 Series or the Fairfield Inn by Marriott. Another is to bundle services to provide extra value at the same price, such as free shipping by Amazon or McDonald’s Happy Meals. Still another is to demonstrate the value of quality—Bounty towels are worth it because they simply last longer. Finally, the frame of reference can be changed—other products can become the comparison standard. For example: KFC’s Family Value Meal vs. home cooking, or Crayola’s 64 colors vs. more expensive toys. 

During tough times, it is crucial to protect the loyal customer base, which is usually the most important brand asset. Overinvestment in their satisfaction will pay long-term dividends because when things turn around, they will be the base on which the brand will build. Resist efforts to compromise the experience and especially the quality of the offering. Use loyalty programs to focus on them. Introduce surprise awards that will support their relationship with the brand and the firm.

During bad economic times, marketing cuts are going to be inevitable. Smart marketers will find a way to capitalize on moment-in-time opportunities, raise their game, and build a foundation that will serve both brand and business when better times return.

Brand and marketing pioneer David Aaker is Vice Chairman of Prophet; he has published more than 100 articles and 14 books, including his latest, Spanning Silos: The New CMO Imperative.

Can Detroit Make Car Buyers Care Again?

By Andrew Pierce

In the midst of the intense debate over the “lifeline” bailout for the down-and-out U.S. automotive industry, a fundamental issue remains unaddressed: How can Detroit create brands that consumers care about?

The relentless focus of the discussion in Washington has been on high structural costs, labor negotiations, dealer failure, parts suppliers, and on and on. But no one’s looking at the 500-pound gorilla in the room – relevant (or irrelevant) brands. 

Even in a down market, customers are still buying BMW, Lexus, and Mercedes models on the high end, and, on the low, Prius, Element, and Scion. It's the muck in the middle that no one really wants to tackle or fix. But part of restructuring must be a call to action about which brands should be kept, harvested, sold, or re-positioned – and game plans for each strategy. 

At the heart of the industry’s problems has been its caving to Wall Street’s pressures for short-term results, giving immediate sales efforts precedence over long-term brand building. (They lack the patience for it anyway.) But if General Motors, for one, had taken a long-term view, it might have found that feeding fewer brands would have staved off its 30-point dive in market share.

From a brand perspective, it will take different thinking for the U.S. auto industry to survive. Even as its players are evaluating its current brands and their long-term relevance, they must look differently at new products and adjust the philosophical mindset.

First, new products must be introduced at a cadence that will generate excitement about the brand. Secondly, they should be introduced to growing segments within the portfolio, feeding growth brands and segments versus laboriously shoving products into shrinking segments or brands with diminishing equity. Finally, they must avoid the "me, too" syndrome, which has resulted in brands that are not sufficiently differentiated.

Philosophically, they must look at the customer experience and the need to engage customers at every touchpoint and at all levels of the business. Products and services are not bought or consumed in isolation; it all happens within a context or a broader experience. Further, consensus is needed on the end goal of marketing, which should be geared to both building brand equity and driving sales - not one or the other. And perhaps the most critical need is that of strong leadership. Whether the challenge is to turn around or reposition a brand or launch a new one, achieving success requires a high level of commitment.

A more forward-thinking view of accepted brand strategies is not the ultimate solution to all that ails our automakers. But it can't help but assist them in digging out of their deepening hole.

Andy Pierce is a senior partner of Prophet. An earlier version of this article appeared in Marketing News, and can be seen here.

Dixon on Problem Solving – Bad Times or Good

Combine engineering and architectural credentials with a deep expertise in brand strategy, and you get why Prophet Senior Partner Peter Dixon’s perspective is unusual and his insights are in demand. “It’s all about making values visible,” he says. In an interview, Dixon shares the kind of thinking that helps businesses transform – whatever the economic conditions.

What would you say are the greatest challenges in this business environment?
This is an environment that calls for strong strategy, and what’s doubly important is the execution against that strategy in a way that brings it to life. Now, more than ever, we need ideas that are relevant to the business and to customers and are not indulgences. Design has to be effective. It has to help change behavior more than ever, and that makes it imperative to link design to business strategies.

Your specialty is translating strategy into experience. What are the challenges here, and are they heightened in the current economic environment?
It’s a challenge in any environment, but success at it really is what differentiates leaders. McDonald’s is a great example with its full-blown brand strategy around this idea of “Forever Young.” It was all about continually being relevant, and a whole set of activities were tied to – new products, new pricing, new nutritional efforts, and a new advertising campaign with the “loving it” tagline. While at my former employer, I was involved in helping translate “Forever Young” to the restaurant environment. A lot of this was tied to young adults, figuring how to make McDonald’s relevant to them. You know, a restaurant that would let them hang out, and where they wouldn’t be embarrassed to be seen. Because it offered things that were about their lifestyle. So we brought in elements like music, WiFi connectivity, and in-store videos – all these elements that brought the strategy to life, but in a way that was also appropriate for moms and younger kids. That translation represented a big leap for McDonald’s.

Prophet talks a lot about the art and science blend that makes for the best marketing. How does that concept tie back to your philosophy and how it has unfolded in the work that you have done?
A lot of businesses characterize themselves as creative and intuitive, experientially driven, like Apple. Or, they see themselves as completely analytic and process driven. Both, I think, are finding that they need a bit more of the missing element – science on one hand, art on the other – to be more effective. In fact, I believe organizations are ready to embrace more deeply a design thinking philosophy, which calls for the synthesis of a much broader range of inputs from both the art and science sides to create the best, most innovative results.

Design thinking? This isn’t typical marketing-speak.
Two things differentiate design thinking. One is the notion that input comes from a variety of places, not just the focus group, or syndicated marketing research, or the inspirational ideas gained through graphic observation. A broader set of inputs allows you to synthesize more powerful solutions to business problems. The second is the whole iterative nature of a designer’s approach: Whether you sit in front of a screen or work on a little model of something, it’s going to be wrong a whole bunch of times before its right. You learn every step of the way through this iterative process. Business thinking is about getting it perfect and then launching it. In design thinking, it’s about trying different things and iterating the solutions faster.

Design thinking is not a flavor of the month. It is an intrinsically powerful way to think about the world, whether brand or design, and going beyond the marketing jargon. It’s essentially a different way of thinking to devise powerful ideas that will help build business. And that’s a relevant notion to be exploring these days.

To learn more about Peter and his work, please view his bio here.

Recommended Reading

Sauce of Conversation, By Vanessa Cohen
In this article, Vanessa discusses Pizza Hut’s rebranding of some of its outlets as ‘Pasta Hut’ and whether or not it will produce long-term growth for the brand. 

Get (and keep) Great People, By Roland Bernhard
This article examines the Employee Value Proposition as a potential strategy for attracting and retaining the best people in tough times. (Customer Strategy, November 2008)

Radio Show Author Series: David Aaker
This Marketing News Radio interview with David Aaker focuses on the key themes from David's newest book, "Spanning Silos: The New CMO Imperative." (Marketing News Radio, October 29, 2008)

How Financial Services Marketers Should Deal With Crisis of Confidence, By Chiaki Nishino and Fred Geyer
As the global financial meltdown spreads, it’s clear that financial brands have been profoundly damaged by a crisis of confidence among their stakeholders. Brands that until a few weeks ago were pillars of the community are today widely distrusted. Marketing leaders didn’t get financial institutions into this mess. But they will be instrumental in repairing the damage.

Most frequently downloaded from www.prophet.com

Leveraging the Corporate Brand, By David Aaker
A perspective on how a company can dial up the importance and role of the corporate (company) brand. (California Management Review, March 2004)

Other articles of interest

Hard Times Can Drive Innovation
Wall Street Journal, December 15, 2008
Sure, the economy's bad. But it's a good time to innovate, according to Clayton M. Christensen, a Harvard Business School professor who focuses on innovation.

Stories of the Year
Advertising Age, December 15, 2008
Detroit's meltdown and the continuing recession have been dominating the news recently, but there were other major news stories this year, including the election of Barack Obama as president and the sale of all-American Anheuser-Busch to foreign-owned InBev.

Amazon: Armed to Beat the Recession
BusinessWeek, December 9, 2008
Analysts say the e-tailer's new iPhone shopping app, among other high-tech tools, will help it outperform rivals amid weak consumer spending.

For additional interesting articles and factoids, check out our blog - BackPocket.

News and Events

David Aaker’s new book, “Spanning Silos” has been getting a lot of media attention. It was listed as one five books listed on Alan Mitchell of Marketing reviewed the book as well. 

Roland Bernhard, Prophet partner in Zurich, was featured in Handelszeitung, discussing the impact of the financial crisis on the UBS brand and summarizes the near- and mid-term outlook of the brand. *Please note, this interview is in German.

Fred Geyer talked beer; specifically the success of brands to come out of a recession.

Spotlight on Speaking

Chicago GSB Alumni Event
January 25, 2009 — Chicago, IL
Scott Davis discusses his upcoming book, The Shift."

Criticaleye Breakfast Briefing
February 26, 2009 — London, UK
Michael Dunn is discussing his new book, "The Marketing Accountability Imperative" at this interactive and dynamic meeting.


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