To Win At Business, Compete On Value (Not Price)

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Posted: 04/12/2017

Editor's Note

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

With these 12 these words, Peter F. Drucker introduced to the world what has become known as the marketing concept, that is, "find wants and fill them."

More specifically, Drucker made two profound statements: one about the corporate purpose, its essence and its goals; the other about the tasks necessary to achieve these purposes and goals.

Simply put, the first job of management is to design and develop products/services that fulfill customer needs.

Every organization must continuously identify what customers need, want, value, expect, and are willing to pay for.

The second job is to develop the appropriate organizational structures to deliver to the customer what the customer getting proposition promises; this is the only way to keep customers.

More than 60 years later, academics and businesspeople still rave about it, write about it, and tell the uninitiated how this marvelous concept can transform a sleepy organization into an energetic, market-focused entity.

Harvard's Ted Levitt and celebrated marketing guru Philip Kotler (among others) amplified and expanded Drucker's seminal work on strategic marketing as a discipline.

They showed us how to use Drucker's marketing concept to compete on value as opposed to price; how to differentiate offerings from rivals; how to defend against inevitable competitors; and how to gain market position from established competitors.

Truth be known, the relatively recent field of strategic marketing has rendered obsolete much of the subject matter in microeconomics (i.e., the theory of the firm). 

Strategic marketing has taught us a more realistic way to understand how organizations allocate resources, continuously improve productivity, identify and exploit success, price for short-term and long-term profit, and practice successful innovation.

Economists know very little about the discipline of strategic marketing. They seem to prefer dealing with mathematical abstractions and what Drucker called "the poverty of economic theory."

Whereas strategic marketers must deal with the real world dynamics of consumption, competition, and innovation. The macroeconomy is, in most part, the sum total of how well individual organizations perform.

The science and practice of strategic marketing inevitably leads to more products, services, and experiences at irresistible prices. In short, the development and delivery of products and services to inspire consumers to buy and companies to invest in exciting things.

This article is the first in a series illustrating how to achieve success on the corporate battlefield using the strategic marketing strategies developed by Drucker, Levitt, Kotler, and others.

Introduction

The way you view a product or service can determine your organization's future success.

Philip Kotler and Tom Peters outlined three distinct product concepts that all businesses must define–namely: (1) formal product, (2) core product, (3) augmented product. 

The formal product is the tangible product or service being sold to consumers. Examples include short courses for practicing professionals, tax advisory services, computers, smart TVs, political candidates, and steel reinforcing bars.

This view of a product leads to advertisements that stress functional design, complicated features, product quality, price, and the like.

The core product, meanwhile, is the essential benefit that is being offered to (or sought by) the buyer.  In other words, “Why is the consumer buying the product?” 

People buying an e-learning program from a university on, say, production planning, scheduling, and control are not only buying a certificate of completion or a course, they’re buying productivity improvement skills.

Levitt pointed out people do not buy quarter-inch drills; they buy quarter-inch holes.

 A woman buying lipstick is not simply buying a lip color. Charles Revson, founder of Revlon, Inc. said early in his career: “In the factory, we make cosmetics, in the store we sell hope.” 

Bottom line: The marketer's job is to identify and sell core benefits, not features.

Finally, the augmented product is the totality of benefits the buyer receives or experiences purchasing the formal product.

Ted Levitt repeatedly pointed out customers rarely buy just a product. Usually, they buy a total proposition—an entire package of perceived values. One could call this the unique selling proposition (i.e., USP).

“Companies do not compete on the basis of what they make in their factories,” said Levitt, but rather between “what they add to their factory output in the form of packaging, services, advertising, customer advice, financing, delivery arrangements, warehousing, and other things people value.” 

Levitt called this “surrounding of the core product with a special cluster of values.” Indeed, he coined the phrase to describe this as “the augmented product concept.”

In an early edition of Marketing Management, Kotler offered this illustration:

The augmented product of IBM was not only the computer but a whole set of accompanying services, including instruction, canned software programs, programming services, maintenance and repairs, guarantees, and so on.

IBM’s outstanding position in the computer field is due in part to its early recognition that the customer wants all of these things when he/she buys a computer… 

This recognition leads to the notion of system selling; the company is selling a system of benefits, not just a computer… 

It leads the sellers to look at the buyer's total consumption system—the way a purchaser of a product performs the total task of whatever it is that he or she is trying to accomplish when using the product. 

Stated differently, companies differentiate their offerings by including value-added services that competitors find difficult to duplicate. 

Strategic mergers and acquisitions are—in many instances—fueled by the need to surround the organization's core product with a value-added service that competitors will struggle to duplicate.

Selling Fertilizer or Improving Agricultural Productivity?

In discussing the topic of differentiation through augmentation, Levitt used the case study of International Minerals and Chemical (IMC), a fertilizer corporation which was renamed The Mosaic Company after a 2004 merger.

Years ago, IMC saw itself selling a commodity (i.e., fertilizer) that was undifferentiated in the marketplace and therefore subject to fierce price competition.

Then, IMC's management crafted and implemented a marketing strategy that enabled them to compete on value rather than price

IMC analyzed the business problems of its prospects and then did something imaginative with its findings: It created a farm management program that enabled its farm customers to increase their agricultural productivity.

In essence, IMC offered—free of charge—a computer-based consultancy service to people who bought IMC's fertilizer.

IMC designed and developed a state-of-the-art computer program called M.O.R.E (Mathematically Optimized Resource Employment).  

Said Levitt: "The marketing concept views the customer's purchasing activities as being problem-solving activities… IMC did not offer a better product, but it offered a different product—a product with new and superior benefits for its users."

IMC's computerized scientific farm management service was designed to make more profit for the farmer through proper and balanced use of IMC's fertilizer nutrients and other agricultural chemicals. 

IMC, according to Levitt, gained significant market share from rivals and their profits soared.

Marketing as The Core Connector

Marketing is the one function that transforms other business functions. 

Because Drucker found that there were “no departmental customers,” marketing became the corporate catalyst that integrates all the organization's strengths and core competencies in the pursuit of winning and holding customers.

Viewing marketing from the systems angle of vision makes it impossible to perceive it is an independent function. It is the whole business seen from the point of view of its final result, that is, from the customer's point of view. 

Simply put, the customer is the business! Every function—from manufacturing to call centers—must do its part in creating and keeping customers. 

Drucker and Levitt designated marketing as the one business function that is the direct concern of all employees, especially those who have direct contact with the customer.

A Caveat

It should be noted that most organizations have, at least, two distinct customer groups: distributive channels and end-users. (We will discuss this in detail in a future article) 

Each of these groups must be provided with a unique set of values or benefits; each needs their own augmented product. Successful companies harmoniously mesh the needs of both customer groups.  

Check out part II of this series (Think You Know What Your Customer Wants? Think Again) by clicking here

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Posted: 04/12/2017

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