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In Rethinking Marketing: From Marketing Products to Cultivating Customers my co-authors and I wrote about how companies must make products and brands subservient to long-term customer relationships.  We also made the point that for ongoing customer value innovation to become a part of the DNA of the organization, it is important that the company move from an internally focused concept of customer value creation, to a more open, collaborative model of co-creating value with customers and other key stakeholders.

In much the same way, I'm more convinced than ever that we must rethink the purpose of modern businesses.  As the global financial crisis has so bluntly shown us, "maximizing shareholder value" is no longer a sustainable purpose for business.  We doubt it ever was.  But back then, Jack Welch was preaching the gospel and companies were lapping it up.  Interestingly, even Jack Welch is no longer singing the "maximize shareholder value" song. This is the age of consumer capitalism and the triple bottom line.  The new gospel is people, planet, and then profits.  Near term thinking that just does good for the company without consideration for the environment, or the social social systems that a company operates in, is not a responsible option!    

So where should we look for new role models? 

Across the border to the north, and across the Atlantic to the sub-continent.

 

Recently I read an article describing Ratan Tata's visit to Canada to deliver the first Thomas Bata Lecture on Responsible Capitalism.

The late Thomas Bata and Ratan Tata, and their corporations have a lot in common.  They epitomize socially-conscious leadership. 

The Tata story has been well covered in this article, which sums up the vision as follows:

Since its founding in 1868, Tata has operated on the premise that a company thrives on social capital (the value created from investing in good community and human relationships) in the same way that it relies on hard assets for sustainable growth. With every generation, Tata's executives and managers say, they have nurtured and improved their capability for "stakeholder management": basing investments and operating decisions on the needs and interests of all who will be affected. For Tata, this means shareholders, employees, customers, and the people of the countries where Tata operates -- historically India, but potentially anywhere.

These are not platitudes. Tata has won the goodwill of the people not by talk, but through action. Key decisions are based on the impact on society.  The company's humanitarian actions, for both employees and non-employees, following the dastardly November 2008 terrorist attacks on the Taj hotel are well documented, and have won raging applause from even the most anodized critics of business. 

People first, business second.  Both Bata and Tata teach us that it is possible to be a global powerhouse without sacrificing one's soul.  It is not necessary to separate social good from business well being, as so many companies do.

Dartmouth's Professor Vijay Govindarajan explains the Tata Nano as a social innovation:

Through his actions in the Tata Nano project, Ratan Tata has demonstrated that capitalism can have a soul--the profit mission and the social mission do not conflict and can, in fact, be pursued simultaneously. 

Increasingly, we are going to see businesses doing well by doing good, a philosophy that guides thinking and decision making at Unilever. In a recent discussion, Harish Manwani - President Asia, Africa, Eastern and Central European Regions at Unilever - shared that for Unilever value co-creation was not just collaborating with customers, it is collaborating with the interlinked ecosystems that the company operates in.  According to him, this passion and commitment to doing well by doing good, is the reason why the Dow Jones Sustainability Index has rated Unilever as the best company in its category for ten years running. I intend featuring more of the Unilever social responsibility story in my forthcoming blogs.

Social good and company well being can co-exist, as the examples of Bata, Tata, and Unilever demonstrate.  They should not be divorced from each other any longer. The people and the social systems they live in are both customers of the company.  The paramount purpose of modern businesses should be more than just "Do No Harm."  Rather it must be "Do Long Term Good for All."

India's economy and its companies have been getting a lot of attention in the past decade.  A trend map of India at the annual Davos conference will attest to this.  A decade ago, India was invisible at Davos.  Today, to the uninformed observer, Davos may well be a Bollywood party.    

The Tata Group, Mittal, Reliance, Infosys, Hindustan Computers Limited, Ranbaxy, ICICI, Hero-Honda, and Bharati Airtel are a few Indian companies that regularly garner media headlines.  The world knows a lot about these companies, and their products.  But what does the world know about the leadership of these companies?  The answer is very little.  Beyond a few names, like Naryan Murthy, Ratan Tata, Mukesh Ambani, and Laxmi Mittal, the West knows little about how Indian companies are managed.  The India Way, authored by Peter Capelli, Harbir Singh, Jitendra V. Singh, and Michael Useem intends to rectify that.  

Do Indian companies have their own way of managing and running their companies?  The answer is a most emphatic YES!  Instead of using management ideas and practices that dominate Western businesses, Indian companies are applying fresh practices of their own, to shape their strategy, leadership, talent, and organizational culture.

Here is a sampling:

• The best Indian companies drive their performance by investing in people; motivating them, empowering them, and investing in their training
• For them, the CEO's office and function is not as critical as in the West.  Many of these companies don't even have that title, and practice group decision-making at the top
• Envisioning a path to the future, strategic thinking, and guiding change is very critical to the leadership of these companies
• As is being inspirational, accountable, and entrepreneurial

 

Corporate Social Responsibility (CSR), is not an occasional, negotiable activity for most Indian companies.  Partly because most organizations in India tend to be surrounded by mass poverty, and partly because CSR is a reputational asset that helps negotiate deals with the government, companies are very serious about their obligations to the ecosystem they operate in.  40% of all Indian companies routinely monitor their progress on CSR goals, compared to just 17% in the U.S.  

Are these practices transferable to the West?  That all depends on the priorities of Western companies.  Consider the top priorities of Indian companies:

• Looking beyond stockholders' interests to public mission and national purpose
• Drawing on improvisation, adaptation, and resilience to overcome endless hurdles
• Identifying products and services of compelling value to customers
• Investing in talent and building a stirring culture. 

Perhaps the experience of dealing with obstructionist bureaucracies, crumbling and antiquated infrastructure, and growing up in hardship and scarcity can't be replicated.  But inspiration to do well by one's employees, and build lasting legacies, around entrepreneurship and long-term success, can certainly be imported, and emulated.   

There's always been an India Way.  Its just that its more palpable today.  Hunger can be a beautiful thing - especially the hunger of challenger companies not to be perceived as mere Xerox copies of front line Fortune 500 companies.  Let's hope, for their own sake, Indian companies don't forget this.  

The old adage - Fat Dogs Don't Fetch - applies to all companies in all countries!

Cogito ergo sum - one of Descartes's most famous legacies - loosely translated as, I think, therefore I am.

Peter Drucker had a similar way of introducing himself - I write - is how he used to introduce himself.  What Peter should have really said was - I think and I write, and I don't know which one comes first.  An interesting chicken and egg problem, but not one you lose sleep over, especially if your writing borders on the prolific, and your thinking can stand the test of time!

November 2009 marked the 100th anniversary of Peter Drucker's birth and we should celebrate it.  Universally acclaimed as a great management thinker and business guru, for over 50 years, from the early 1950's to the early 2000's his provocative and often controversial ideas dominated the business world. 

The management kingdom is rediscovering him and finding him to be just as relevant as he was all those years ago. 

HBR ran a special issue on Drucker in Nov. 2009 - asking What Would Peter Drucker Do?

Books like Inside Drucker's Brain are attempting to make him and his cutting edge thinking more accessible.  

Paradoxically, in the West, where he made his greatest contributions, he is all but forgotten, pushed aside by gurus du jour.  On the other side of the Atlantic, Drucker societies are still alive and flourishing.  They assemble routinely to discuss his work and learn from his teachings.

It is impossible to compress a sixty-year career comprising over thirty books that have sold over 5 million copies and scores of articles, including some HBR classics, in a page or two.  So, how about we take inspiration from Hollywood and present instead a 90 second trailer on the World according to Peter Drucker.

His signature idea - Management by Objectives; still relevant, especially as companies flounder with direction and purpose. 

His committed and unwavering focus - the long term health and well being of companies, not short-term hits.  He rarely blamed individuals, maintaining that it was always the underlying systems that were the root causes of failure.  He believed organizations should constantly challenge their design and operations; he saw this as the key to long-term well being.

His favorite questions - What is your company's ultimate purpose? Who is the customer? What is your mission?  What is it you should continue to do?  What is it you should stop doing? Where has the obsession with the short-term undermined long-term effectiveness? Why aren't some younger people in the company earning more than the Directors?  

His passions - writing, context-bound thinking, integrating ideas, processes not outcomes, urging companies to innovate and create the future, long-term corporate well being, nurturing future stars, and of course - the CUSTOMER!

What did A.G. Lafley, ex CEO of P&G, learn from Drucker?

In A.G.'s own words:

Over the years, I learned many things from Peter, but far and away the most important were the simplest:

1. The purpose of company is to create a customer.
2. A business is defined by the needs, wants, desires a customer satisfies when buying the company's product or service.
3. To satisfy the customer is the most important mission and purpose of every business.

No presentation of Peter Drucker's work is complete without sharing some of his memorable quotes and brilliant observations.  A very brief, you might even say self-serving, sampling related to marketing, the customer, and innovation follow.   

• Because the purpose of business is to create a customer, the business enterprise has two--and only two--basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are costs. 

• The customer rather than the manufacturer defines a market

• Of course innovation is risky.  But so is stepping into the car to drive to the supermarket for a loaf of bread.  All economic activity is by definition 'high risk.' And defending yesterday - that is, not innovating - is far more risky than making tomorrow.

Paraphrasing Drucker and taking a few artistic liberties: since customers define markets, and market creation should be the fundamental focus of a company, and innovation is the primary fuel that drives this market creation - then what better world to be thinking, writing, and consulting in, than customer-driven innovation!

CMO Archetypes:



While the effort of the AMA to peer into the future is laudable, I am personally very troubled by the output, and the lack of emphasis on some fundamental game-changing trends like customer collaboration, value co-creation, customization, and open systems thinking.  

The next few years are likely to witness numerous environmental initiatives around the globe.  For starters, the 2009 UN Climate Change Conference is expected to update the Kyoto Protocol.  Additionally, several countries are looking to green policy stimulus packages to pull them out of the current recession.

You can hardly turn on the television or open a newspaper without witnessing a company's advertisements featuring its "green" or "sustainable" products or business practices. 

In response to rapidly growing demand from consumers, the market for these products tripled between 2007 and 2008 with Nielsen predicting a marketplace of more than $400 billion in 2010.

But what do companies mean when they claim a green product or sustainable business practice?  A range of interpretations exist, but the majority feature these ideas:

•    Green products are both environmentally and socially responsible and can often be described as follows: organically grown, locally sourced, carbon-neutral, recycled/recyclable, and/or energy-efficient.  A variety of sources show that consumers perceive consumer goods manufacturers such as Seventh Generation, which makes cleaning products from natural ingredients, and Toyota, with the Prius and its commitment to environmental management, as some of the world's greenest companies.

•    Sustainable business practice can include organizations that produce green products and services but more broadly, it requires a corporate focus on long-term benefits for the environment, community, and society.  Sustainable companies also pursue the "triple bottom line" of people, planet, and profits.  Wal-Mart and Whirlpool, with their efforts to "green" their entire supply chains and introduce eco-friendly products to the masses, represent two companies dedicated to sustainable development.  Some researchers also cite products linked to a cause, such as the Product Red suite, whereby companies donate proceeds to fighting AIDS in Africa.

Due in large part to rapidly shifting consumer attitudes and increasing enthusiasm for green products, companies ranging from Honda to Clorox brought nearly 6,000 "green" products to market in 2007 alone.  However, this proliferation of products during a global recession has led consumers to become very discerning regarding the legitimacy of companies' green claims.  The cynicism is justified, as often terms like green and sustainable are used to describe a variety of practices ranging from "greenwashing" to reputation-management to customer-focused, holistic sustainable business practice.  

As more companies make green claims, government and consumer scrutiny of these claims also increases.  Many groups now watch out for greenwashing, a practice whereby companies lead consumers to think that their products are more environmentally friendly than they actually are.  Clairol received considerable scrutiny in the early 2000s for claims that its Herbal Essences line offered "a truly organic experience," when in fact, the formula included many chemicals.  More recently, Kmart and other chains have provoked criticisms for false claims of biodegradable paper goods.

Companies working to improve their reputation in the area of sustainability attempt to offset or neutralize the effects of their businesses without concerning themselves with influencing consumer behavior or the behavior of partners in their supply chain.  Enterprise Rent-a-Car, for example, has independently committed to building 50 million trees over the next 50 years to more than offset the emissions from its vehicles.

However, the most interesting examples of greening and sustainability tend to be where companies actively involve their customers in sustainable business practice.  These companies are most likely to improve their own profitability and succeed in tangibly benefiting their communities through improved consumer behavior.  A few examples of companies leading the pack follow.

Whole Foods won the 2009 Green Choice award from Natural Health magazine due to its commitment to substantive, earth-friendly initiatives that inspire its suppliers, competitors, and customers to follow suit. 
•    After banning plastic bags from its stores in early 2008, the company recently announced that three times as many customers now shop with reusable bags.   Furthermore, it estimates that this shift has kept 150 million bags out of landfills since 2008.  COO A.C. Gallo states, "At first we wondered if shoppers would just switch to paper but to our great surprise, people have been truly excited about using reusable bags."

Fairmont Hotels and Resorts was the first global hotel to launch an environmental management program back in 1990.  Since then, its commitment to sustainability has touched its partners, guests, and the broader business community. 
•    By 2010, the company's largest suppliers will comply with its Green Procurement Policy.
•    The company has sold tens of thousands of copies of its Green Partnership Guide, a "going green" handbook for companies across industries. 
•    Guests worldwide pay a premium to contribute to the company's environmental initiatives, which include Lexus Hybrid Living Suites and Travel Green packages:

Finally, retail giant Wal-Mart has committed itself to improving sustainability across every facet of its business, extending this goal from suppliers to stores to consumers.  The trump card with consumers, not surprisingly, continues to be everyday low prices even within its green product lines.  Evidence that collaboration with consumers is working:
•    66% higher adoption rate of green products (including compact fluorescent bulbs, organic foods, and paper products made with recycled material) among its shoppers between April 2007 to April 2008
•    Increased mainstream acceptance and purchase of Clorox Green Works natural cleaning products and Fair Trade coffee

Corporate practices in green and sustainable initiatives are still in an embryonic stage, making it difficult to offer a prescription for those companies who have yet to start walking.  Perhaps you have come across some initiatives that have impressed you or made you change your own behavior. 

Care to share them with the readers of this blog?  Please do, we can learn together.

The answer: A desire to grow through innovation, to provide greater and better value to their customers/citizens, and to co-create this value with selected collaborators and customers.

Let's visit General Mills first.

Most companies have big egos!  Not surprisingly they are quick to disproportionately aggrandize their own skills and knowledge; especially when it comes to innovation and new product/service development.  A symptom of this kind of thinking is the not invented here (NIH) syndrome - companies suddenly turning deaf and blind to suggestions coming from outside their four walls.

At one time or the other, the NIH syndrome has struck several big and not-so-big name companies.  Apple, Hallmark, and even P&G are all guilty.  Remember the well-publicized case of Shea O'Gorman.  Apple drove the 9-year-old third-grader to tears, when in response to her hand written letter to Steve Jobs offering ideas on how to improve the iPod Nano, she got a response not from Steve but from the company's law department.  They curtly informed young Shea that Apple doesn't accept unsolicited ideas, so she should not send them her suggestions and if she wanted to know why she could read their legal policy posted on the Internet.  

Till very recently General Mills had their own version of NIH - Policy 16 - which stated that no outside product suggestions would be accepted.  But all that changed a few years ago when the company had Wheaties for breakfast and became a champion and an industry role model for open innovation.

General Mills' G-WIN, an open innovation initiative, is entering its terrible twos.  Happy birthday G-WIN!  The initiative seeks outside partnerships with entrepreneurs, inventors, universities and other food companies.  During its young life the program has generated hundreds of concepts for patented technologies or potential products that are complementary to its existing brands and businesses.

Two notable successes:

• Fiber One® Chewy Bars: General Mills teamed with an exclusive partner on a fiber ingredient to develop a delicious snack bar with 9 grams of fiber per bar. Within months of the product launch, Fiber One bars were among the top 10 best-selling grain bars on the market.
  
  
• Progresso® Reduced Sodium soups: Through a new proprietary partnership with an external company with considerable expertise in healthy foods, General Mills was able to source a great-tasting new lower-sodium ingredient for its Progresso Reduced Sodium soups.  In the first year of launch, fifty percent of sales for lower-sodium Progresso soups came from consumers who weren't previously buying Progresso.

Collaboration and customer driven innovation bring resources, passion, and an energy that companies bogged down by their rules, standard operating procedures, and reverence for hierarchy just can't match.  

It's just not companies but also countries that are fast signing on.  Not surprising to see Finland, one of the top 3 knowledge economies of the world, leading the pack.  Last Fall, Finland, home of Nokia, the world's largest manufacturer of mobile phones, unveiled a new innovation plan to keep the tiny Nordic country competitive in an increasingly competitive global market. 

Two aspects of the new strategy are especially noteworthy:

• A desire to be more connected with innovative companies and researchers from abroad - Finland has just over 5 million people.  In order to make this connectedness a reality, Finland has begun establishing a network of international innovation centers under its FinNode program.  These centers help Finnish scientists and companies establish contacts with centers of excellence globally and can be found in Japan, Russia, China, and USA
  
  
• A second noteworthy objective of the new strategy is to move beyond a knowledge push environment, where scientists and engineers come up with the ideas and push them to the market, to a demand pull system, with private companies and users playing an active role in market oriented innovation.

Two different economic entities, a company and a country, similar platforms for growth - collaboration and customer driven innovation.   Good Luck G-WIN; Onnea Finland!

Cutting back on R&D is not a smart idea, even in tough economic times, despite the temptation to report higher short-term earnings.  That is because stock markets tend to react positively to innovation and R&D announcements and reward companies long before the innovation projects actually reap in the rewards. 

Show me the money you say!  I can with the help of Gerry Tellis and his co-author Ashish Sood.  Their article - Do Innovations Really Pay Off? Total Stock Market Returns to Innovation - is due to be published in Marketing Science, a leading peer-reviewed journal.

However, since not too many of us are going to be devouring Marketing Science any time soon, I thought it would be nice to have Gerry share his thoughts with us in plain English, rather than in simultaneous equations.    

Gerry, do companies truly appreciate the value of innovation?

I don't think so.  Emotionally, I think they understand how important Innovation is in driving growth and in creating new markets, but I don't think they have an effective framework for computing the true value of innovation and its payoff in the long run.  So, in a nutshell, they understand its importance, but underestimate its value and payoff.

What are some of the roadblocks that prevent companies from appreciating the full value of innovation?

The payoff to innovation is highly uncertain and occurs over the long term.  Firms find it very difficult to measure this payoff.  They tend to believe that stock markets react positively only to announcements of immediate earnings, so they eschew spending on risky, long-term projects such as innovation, to boost their firm's stock price.  

You of course disagree?

Absolutely.  That's what our paper is all about.  Our assertion is that stock markets value announcements on innovation projects and reward companies with disproportionately higher stock returns.  Our results clearly show that the total market returns to an innovation project are $643 million, more than 13 times the return of $49 million from an average innovation event.  Additionally, returns to initiation of innovation projects occur 4.7 years ahead of launch.

Gerry, could you please explain briefly, three key terms which are central to your research, but which the reader may be puzzling over - innovation project, innovation event, and announcement?

Sure:

• An innovation project is the sum total of all of a firms activities (such as researching, developing, and commercializing) involved in introducing a new product based on a new technology; from initiation to say about 12 months after launch
• An innovation event is some tangible event indicating that the project is progressing, such as patents, launch, and new rounds of funding.
• An announcement is release of information about the innovation event, either directly from the firm, or from other sources

Surely the stock market is not just reacting to the announcement of innovation projects, what if a company games the system?

The market is reacting to the announcement, as it's a strong signal of intent.  But it does so in an efficient, intelligent manner.  We found that a company can't game the system by merely varying the sheer number of announcements; quantity of announcements are not related to returns.  So, no evidence that a company can influence returns by adopting different announcement strategies.

What about negative announcements - as when a firm slips up, fails to carry through its intentions, has to abort what it announced earlier, how do they influence returns?

In a big way!  We found, that on average, returns to negative announcements are higher in absolute value than returns to positive announcements.  Which is why companies should think twice before resorting to vaporware or exaggerating progress in their innovation projects.

You also claim that your paper is unique in the way you approach an innovation project - as three distinct phases, rather than as a single homogenous activity.  Help us understand that?

You are right; our paper does make a unique contribution.  Managers may want to know which set of activities attract the highest returns.  And to the best of my knowledge, no previous study has answered this question.  By examining the innovation project as a set of three distinct activities, we are able to do just that. 

And the three sets of activities being - - -?

Initiation, development, and commercialization -

• initiation - start of a project, comprising events like alliance, joint ventures, and funding
• development - progress in research, comprising events like patents, prototypes, and preannouncements
• commercialization - marketing an innovation, comprising events like product launch, shipments, and awards  

And which activities attract the highest return?

We find that development activities generate the highest return, followed by initiation and commercialization activities. 

I find this a little counter-intuitive, given the importance placed on execution and implementation.  

To be honest, we were a little surprised too.  There is no strong theory to support this result.  However, we think that development won out because development activities represent a greater reduction in uncertainty than commercialization and they don't require as much upfront investment as initiation.

Its time for some free consulting Gerry - what advice would you give to companies to actively manage payoffs on their innovation projects?

• First, managers should adopt a new metric to gauge whether and to what extent their R&D efforts are paying off in the long run; market returns capture the discounted future value of all current events.
• Second, they should learn that markets respond to and reward all stages of an innovation project; by limiting the value of innovation to a few select events, companies actually undervalue the total returns to innovation.
• Third, communication of progress on innovation projects, without resorting to exaggeration or vaporware, is absolutely critical.  If companies don't manage this proactively, they lose the opportunity to increase their market capitalization from positive announcements.  

Thank you Gerry.  Good to have you share your insights with us.  And while we wait for Gerry to generate some more blockbuster insights, let's update our thinking and knowledge on measuring the true payoff to innovation, so we don't kill innovation projects prematurely, or delay initiating them.

  

In the Feb. 2009 issue of HBR, Tom Davenport offers advice on how to design smart business experiments. His main assertion is that in too many companies business innovations are launched on a wing and a prayer.  

Have you heard Branford Marsalis' rendition of I heard you twice the first time?