Craven Chapter 5

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5
Chapter
Capabilities for Learning

About Customers
and Markets
Market-oriented companies display superiority in understanding customers, markets,
and competitors. “Every discussion of market orientation emphasizes the ability of
the firm to learn about customers, competitors, and channel members in order to
continually sense and act on events and trends in present and prospective markets.”1
Market-driven companies display innovative skills in gathering, interpreting, and using
information to guide their business and marketing strategies and to achieve competi-
tive advantage.
Increasingly, learning about markets is more about interpreting information than find-
ing it. With resources like online Internet searches, in-company information and intelli-
gence systems, marketing research agency reports and surveys, ethnographical research
techniques, and burgeoning technical literature in most fields, executives may be in danger
of being overwhelmed by information. Research suggests that how accurate executives are
about the competitive environment may be less important for strategy, and the organiza-
tional changes that follow strategy, than the way they interpret and understand informa-
tion about their environments. This suggests that investments in enhancing and shaping
those interpretations may create a more durable competitive advantage then investments
in obtaining more information.2 The imperative in market-led strategy is the quest for
superior interpretation and market understanding.
Industry-based research by the Business Performance Management Forum suggests that
companies fail to respond to fast-changing markets because they are unable to understand
and adjust to what their customers want. The failure of executives to “read” their markets
means their companies struggle to meet the demands of increasingly competitive interna-
tional markets and sophisticated customers.3
Procter and Gamble illustrates the competitive strength that comes from superior cus-
tomer knowledge. A.G.Lafley has managed a transformation at P&G since he arrived in
2000, pushing the company up-market in the West and down-market in developing coun-
tries, concentrating resources in the top brands, and, in the merger with Gillette, creat-
ing the world’s biggest consumer goods company which is outperforming rivals Colgate
and Unilever.4 Lafley has made the old P&G more innovative and outward-looking;
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130 Part Two Markets, Segments, and Customer Value
his mantra is “The customer is boss” and he believes that P&G must deliver more than
brands—it must deliver a consumer experience. The new P&G invests less in formal
marketing research and more in talking to people one-to-one in their homes, or in facili-
ties that replicate the home environment—like the Consumer Village, where P&G meets
consumers and works to identify desired consumer experiences with products. For exam-
ple, research teams spent time in homes across the U.S., watching people clean baths,
resulting in the Mr Clean Magic Reach—an extendible tool with changeable clean-
ing pads to reach high areas and tight corners in bathrooms. Researchers have spent
weeks in the homes of low-income consumers to understand what it is like to live on
$50 a month—resulting, for example, in Tide Clean White in China for hand-washing
of clothes. P&G’s virtual reality Cave is a walk-in three-dimensional room where com-
puter-generated imagery allows P&G researchers to test alternative retail concepts and
experiences. In addition, P&G has launched two new social networking sites to gain
insight into consumer habits and preferences in online forums for women. Impressive
innovation and responsiveness at P&G is built on processes for continuous learning and
knowledge-generation.
A theme linking companies in many sectors is their capabilities in superior market
sensing and their ability to develop competitive advantage from their learning proc-
esses. Boeing, for example, has been running an online naming contest—the “Name
Your Plane” program—to connect not with airlines but with airline passengers, and to
better understand their preferences.5 At leading global steel producer, Arcelor Mittall,
competitive advantage has been built over other global steel groups by a knowledge-
sharing program in key activities, that encourages internationally-located operations
to trade knowledge to benefit the network. At General Electric, top employees receive
bigger bonuses and better promotion opportunities based on their knowledge sharing
effectiveness.6
The challenge is increasingly one of knowledge management to build company-wide
understanding of the marketplace and responsiveness, rather than simply collecting infor-
mation. Market sensing and learning are required core competencies underpinning market-
driven strategy.
In this chapter we examine how continuous learning about markets improves competi-
tive advantage. First, we look at the relationship between market-driven strategy, market
sensing, and learning processes. Then, we overview marketing information and knowl-
edge development resources, including marketing research and information systems. Next,
we look at marketing intelligence and knowledge management. Finally, several important
issues are highlighted concerning the ethical issues which surround the collection and use
of information in strategic marketing.
Market-Driven Strategy, Market Sensing, and Learning Processes

The ability to learn from customers underpins market-driven strategy. Market-driven firms
are characterized by their ability to sense and respond to events and trends in their mar-
kets.7 Market sensing is a key capability of the market-driven organization, concerned
with the ability of organizations to continuously learn about their markets, and acts as an
antecedent to market orientation.8 Companies like P&G illustrate the close relationship
between a market-oriented culture and organizational learning. Market orientation is both
a culture and also a process committed to achieving superior customer value (Chapter 1).
The process consists of information acquisition, broad information dissemination, and
shared diagnosis and coordinated action.9
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Chapter 5 Capabilities for Learning About Customers and Markets 131
Market Sensing Processes

There are many approaches used by market-driven companies to understand the oppor-
tunities and threats emerging in their markets, and to predict how customers will react to
changes in marketing strategy. They include:
• Building open-minded inquiry processes—market-driven organizations show an
openness to studying change, to avoid complacency.
• Analyzing competitors’ actions—detailed attention to rivals’ tactics and strategies to
develop understanding of their plans and capabilities.
• Listening to front-line employees—motivating the involvement of staff who are in
contact with customers in building understanding of change and new opportunities and
threats.
• Searching for latent customer needs—finding unserved needs through dialogue,
observation and engagement with customers.
• Scanning the periphery of the market—actively looking for new opportunities in the
market.
• Encouraging experimentation—building culture and process around continuous curi-
osity and new ideas.10
Companies like Toyota, Coach and Samsung demonstrate how the risk in markets can
be shaped by paying continuous attention to how customers are changing, and evaluating
more deeply how markets are developing. They have a “knowledge-intensity,” in which
revealing and relevant data are gathered and studied frequently. Knowledge intensity iden-
tifies both market risk and new opportunities for growth:
It’s answering the question: what do we know about customers that others don’t? And then
using that knowledge to make and keep profitable customers for life.11
Many of the characteristics of robust market sensing strategy and market knowledge
intensity are illustrated in the preparations of Tesco, the British retailer, for entry to the
U.S. market. This is described in the GLOBAL FEATURE. Sensing activities and the gen-
eration of market knowledge are important learning processes, often associated with the
learning organization.
Learning Organization
Our understanding of the learning organization is not complete. The processes used by suc-
cessful organizations continue to be studied and interpreted. However, it is clear that these
organizations share several important characteristics, relevant to superior market sensing
capabilities:
Learning organizations are guided by a shared vision that focuses the energies of organizational
members on creating superior value for customers. These organizations continuously acquire,
process, and disseminate throughout the organization knowledge about markets, products, tech-
nologies, and business processes. They do not hesitate to question long held assumptions and
beliefs regarding their business. Their knowledge is based on experience, experimentation, and
information from customers, suppliers, competitors, and other sources. Through complex com-
munication, coordination, and conflict resolution processes, these organizations reach a shared
interpretation of the information, which enables them to act swiftly and decisively to exploit
opportunities and defuse problems. Learning organizations are exceptional in their ability to
anticipate and act on opportunities in turbulent and fragmenting markets.12
Additional research promises to further expand our knowledge about these complex and
relevant organizational processes.
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Global Feature International Market Sensing

at Tesco International
Tesco is the leading British supermarket retailer. The company has impressive international
growth achievements. International developments are carefully tailored to local customer
preferences and shopping behavior.
The United States is a difficult market for European retailers and many have failed to
adapt to the demands of the American consumer or meet the intense competition.
Tesco is entering the U.S. market with Fresh & Easy, a new neighborhood store chain,
focused on selling fresh food. Initial store openings are in Los Angeles, Las Vegas, Phoenix,
and San Diego.
In planning the new venture, a Tesco team spent thousands of hours trying to discover
what the American consumer wants:
• For two weeks 50 senior Tesco directors and managers lived the “American dream”—
shopping and eating with U.S. families on the West Coast, even sharing their leisure
activities.
• Hiring researchers to probe the refrigerator contents and lifestyles of sixty American
families—checking what time they get up, what they eat for breakfast, when they shop,
and preparing meals for them to try.
• A prototype store was built in secrecy in Los Angeles—the cover story was that they
were making a movie, and executives used plastic bags of cash rather than corporate
charge cards to buy things for the mock store, rather than tip off rivals to what they
were doing. Consumers were flown in to test new ideas and products. More than 200
focus groups toured the store and gave feedback.
The goal is not to transfer the Tesco format from Britain to America, but to design an
American store for American consumers.
While most Tesco U.S. stores will be located in prosperous suburbs surrounding Los
Angeles, Phoenix, San Diego, and Las Vegas, others will be situated in poor, inner-city
areas to address the “grocery gap”—the lack of supermarkets in inner city areas like South
Central Los Angeles. Wal-Mart has been unable to establish inner city stores because of
union opposition, but the new Tesco small retail formats do not need the environmental
and planning approvals that have provided trade unions with the opportunity to block
Wal-Mart’s expansion.
Sources: Kerry Capell, “Tesco: California Dreaming?” BusinessWeek, February 27, 2006, 38. Richard Fletcher
and John Harlow, “Tesco’s Leahy Is Wild About the West,” Sunday Times, September 3, 2006, 3–7. Jenny
Davey, “Tesco Drives into America,” SundayTimes, June 10, 2007, 3–1. Jonathan Birchall, “Tesco Aims to Fill
‘Grocery Gap,” Financial Times, Thursday, June 28, 2007, 20.
Learning and Competitive Advantage

The advantage gained from learning is that the organization is able to quickly and effec-
tively respond to opportunities and threats, and to satisfy customers’ needs with new
products and improved services.13 Learning capabilities and skills are central to business
agility. Learning drastically reduces the time necessary to accomplish projects such as
new product development. For example, fashion retailer H&M can get new designs into its
stores in as little as three weeks, compared to the six months needed by traditional clothing
retailers. H&M’s designers carefully watch fashion trends—for example the worldwide
sales reports. Identifying a new trend leads to immediate action—sketches and patterns
which go electronically to fabrics buyers and production units worldwide. Executives in
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charge can conceive and produce new fashions on their own authority.14 Superior learn-
ing capabilities and speed of learning create a new competitive advantage, which may be
extremely difficult for competitors to imitate or equal.
Interestingly, market sensing capabilities and knowledge-generation may directly create
competitive advantage. United Parcel Service (UPS) has a joint venture with the largest
domestic marketing research agency in China. UPS used this relationship to sponsor two
major studies of urban, middle-class China consumers, to identify the demand in different
market segments for U.S. consumer products. The research reports were made available to
U.S. small and medium-sized exporting firms identifying new business opportunities. The
goal is to gain recognition of UPS as the knowledge leader on the subject, and the premier
carrier flying to more points in China than any other U.S. airline.15 Indeed, it is increas-
ingly common with large customers that suppliers are required to identify end-use market
opportunities for their buyers, and market learning and knowledge developments are key
elements of competing.
Learning About Markets

Learning about markets requires developing processes throughout the organization for
obtaining, interpreting, and acting on information from sensing activities. The learning
processes of market-oriented companies include a sequence of activities beginning with
open-minded inquiry.16
• Objective Inquiry. One danger to be avoided is not exploring new views about markets
and competition, because they are not taken seriously. Search for information is of little
value if management already has a fixed view on which new information will have no
influence whatever it indicates. Not all companies see the value in continuous learning
about markets. Managers who are not part of market-driven cultures may be unwilling
to invest in information to improve their decision-making results. The same companies
often encounter problems because of faulty or incomplete market sensing. Developing
processes for continuous learning allows firms to capture more information about cus-
tomers, suppliers, and competitors.17 This capability provides the potential for growth
based on informed decisions and a more complete mapping and analysis of the com-
petitive environment. Firms can respond much more quickly to competitors’ actions
and take advantage of situations in the marketplace. Open-minded inquiry also helps to
anticipate value migration threats, which are frequently initiated by competitors from
outside the traditional market or industry.18
• Information Distribution for Synergy. The widespread distribution of information
within the organization can leverage the value of the information by cutting across
business functions to share information on customers, channels of distribution, suppli-
ers, and competitors. Synergistic distribution works to remove functional hurdles and
practices. Cross-functional teams are useful to encourage transfer of information across
functions. The explosion in information connectivity (access) facilitates widespread
information distribution.19 Unbundling information from its physical carrier such as
salespeople will provide access as well as speed in organizations. This will help cross-
functional teams and alter hierarchical structures and proprietary information systems.
Expanded information connectivity promises to encourage cooperation among func-
tions and enhance organizational learning.
• Mutually Informed Interpretations. The mental model of the market guides manag-
ers’ interpretation of information. The intent is to reach a shared vision about the mar-
ket and about the impact that new information has on this vision. The market-oriented
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culture encourages market sensing. But the process requires more than gathering and
studying information. “This interpretation is facilitated by the mental models of manag-
ers, which contain decision rules for deciding how to act on the information in light of
anticipated outcomes.”20 The model reflects the executives’ vision about the forces influ-
encing the market and likely future directions of change. Learning occurs as members
of the organization evaluate the results of their decisions based on their vision at the
time the decisions were made. Deciding to take the high risk of cutting-edge ventures
requires managers to reach a shared vision about uncertain future market opportunities.
• Accessible Memory. This part of the learning process emphasizes the importance of keep-
ing and gaining access to prior learning. The objective is not to lose valuable information
that can continue to be used. Doing this involves integrating the information into the organi-
zational memory, and not losing information when people leave the organization. Informa-
tion storage technology is an important facilitator, but the human factor remains critical.
Barriers to Market Learning Processes

In some situations learning processes may be ineffective. If managers do not understand
or accept the value of new information and insight from the marketplace, they are likely
to maintain existing perspectives and reject new ones. Rigid organizational structures and
inflexible information systems may stand in the way of learning and knowledge-sharing in
an organization. Political interests may defend the status quo, or the pressure of existing
business operations may block the capacity of managers to take on new ideas. For example,
Donald Sull describes companies falling prey to “active inertia”—responding to market
shifts by accelerating activities that succeeded in the past—with the result that the mar-
ket changes but the company does not and performance declines.21 While investment in
market sensing and learning process is mandated by both market orientation and the speed
of market change, it is important to recognize that making these processes effective may
require decisive management action to address organizational barriers.
The development of effective market-driven strategy is closely related to market sensing
capabilities and market learning processes. Learning is increasingly proving to be a core
capability of successful organizations. Nonetheless, it is important to recognize that learn-
ing and knowledge-creation disrupt existing business models and open the way to new
ones. Consider, for example, the powerful customer-knowledge-based strategy at Best Buy,
which is examined in the INNOVATION FEATURE.
Next, we examine the various methods of acquiring and processing information for use
in marketing decision making. The objective is to show how the various information capa-
bilities assist decision makers in strategic and operating decisions. A good marketing infor-
mation management strategy takes into account the interrelationship of these capabilities.
Marketing Information and Knowledge Resources

Some marketing information resource development activity is concerned with creat-
ing processes for continuous scanning of markets for rapid noting of significant trends,
events, and changes, while some may be undertaking specific focused studies to answer
management questions—such as the effectiveness of an advertising campaign in a market.
Marketing information resources can be generated internally—for example, in analyzing
company records, or conducting market research studies—or externally—using market-
ing research agencies and consultants. Enhancing the marketing information resources
available to executives may involve using information sources which are already in
existence—for example, a Google search for competitor offerings—or the development of
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Innovation Feature Customer Knowledge-Based

Strategy at Best Buy
Best Buy is the leading consumer electronics retailer in the U.S. and Canada. At the com-
pany’s Minneapolis headquarters there is a mock retail hospital—a row of truncated beds
containing effigies of stricken retailers like Kmart and Woolworths, with their corporate
logos propped on the pillows and their weak financial results on bedside charts. A nearby
sign declares: “This Is Where Companies Go When Their Strategies Get Sick.”
To stay up with agile rivals like Wal-Mart and Costco, Best Buy has shifted its focus
from products to consumers, in a new business model aimed at building a strong position
with the most attractive consumer groups. The Best Buy strategy emphasizes treating each
customer as a unique individual, developing solutions to meet their needs, and engaging
employees to serve them.
New ideas come from listening to customers and employees more closely—ideas
which previously would never have reached corporate headquarters. More than 120,000
employees act as agents of the customer, not the product manufacturer. Employees closely
engaged with consumers identify new growth opportunities. Those with the highest
potential have included small business customers, new services offerings and international
growth—worth $230 billion in revenue in 2007.
Importantly, Best Buy actively shares its customer knowledge with manufacturers and
product developers. The company has assembled a team of engineers, technologists and
product experts from Apple, Xerox, Kodak and other leading R&D companies, focused on
meeting new customer needs.
A core competency for innovation at Best Buy is gathering and synthesizing customer
intelligence. This advances collaboration with suppliers, while building Best Buy’s private
label business in consumer electronics.
Sources: Devendra Mishra, “How Best Buy Uses Customer Input to Develop Private Label Line,”
www.dealerscope.com/story, June 14, 2006. Matthew Boyle, “Best Buy’s Giant Gamble,” Fortune, April 3,
2006.
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Strategy Feature The New Design Team

at Xerox: Customers
Traditional Xerox product development involved building a prototype and then getting
customer feedback. The company has lost business to Canon, IBM, Kodak, and other
manufacturers.
However, new approaches focus on “customer-led innovation” or “dreaming with the
customer.” The goal is “Involving experts who know the technology with customers who
know the pain points”:
• For a new commercial printer idea—focus groups with customers were the first step.
They found that customers were enthusiastic about the idea of a high-speed printer that
could operate at half-speed if a problem arose, instead of shutting down. The result was
Xerox’s first two-engine model—the Nuvera 288 Digital Perfecting System.
• The research team had thought customers would want to use the second engine for
fancy inks or special colors—not to help the broken machine to limp along until help
arrived. Talking to customers changed their minds.
• Xerox’s Group Technology Officer is investing more energy in finding out what custom-
ers think about Xerox’s bright ideas: scientists and engineers are encouraged to meet
face-to-face with the 1,500–2,000 customers who visit showrooms at the company’s
four global research facilities each year; others work on-site with a customer for a week
or two each year to observe products in use; a team of ethnographers is charting cus-
tomer behavior.
Source: Nanette Byrnes, “Xerox’ New Design Team: Customers,” BusinessWeek, May 7, 2007, 72.
new information resources through observation studies, or survey work. There is a wide
variety of potential information sources in enhancing market learning processes, and the
marketing information system provides a way of integrating these.
Importantly, marketing research and information resources should be seen as a model
for innovation and change, rather than simply supporting the incremental administration
of brands.22 Marketing information may challenge the assumptions managers make about
customers and provide them with new insights to guide strategy choices. An illustration is
provided by Xerox’s new product development approaches, described in the STRATEGY
FEATURE.
Scanning Processes
Some information resource development is concerned with building processes for continu-
ous monitoring of customers and markets to quickly identify and explain changes, new
trends, and important events to which executives should respond. Effective scanning must
balance the need to provide executives with relevant intelligence, while at the same time
not attempting to report everything that happens in a market and overloading executives
with information. Nonetheless, scanning may require watching for new opportunities out-
side the existing core markets.23 The strategic challenge is to watch for the signals of dis-
ruptive change in the marketplace, which predict competitive battles to come, or highlight
major strategic choices that executives must make about marketing strategy.24 Scanning
activities will vary across companies—from fashion trend spotting at H&M and Zara, to
daily monitoring of steel prices in different markets at Arcelor Mittall.
Recent advances in monitoring center on Internet-based conversations. Public Services
Broadcasting (PBS) uses the brand monitoring services of Umbria Inc. to analyze Web log
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(blog) conversations that include references to at least six of its top programs. The goal is
to understand better and to watch continuously who is watching, talking about, promoting,
and criticizing its programming online.25 Relatedly, a number of major U.S. retailers have
launched online review facilities to get rapid customer feedback through analyzing con-
sumer opinion about products—purchasers of washing machines at Sears can post online
reviews directly on the sears.com site. Sears judges that the opening of a dialogue with cus-
tomers, from which they can learn, far outweighs any risks to the company’s reputation.26
Organizing scanning effectively as a component of market sensing and learning may
involve a number of initiatives or approaches:27
• Making existing functional groups responsible for scanning—though with the risk
they will focus only on the familiar, not the periphery.
• Create ad hoc issue groups—identify important questions to address and assign them
to task forces.
• A high-level lookout—IBM has a facility called the “Crow’s Nest,” a team scanning spe-
cific topics at the periphery of the organization and sharing insights with top management.
• New initiatives—Shell created its GameChanger Program in 1996, to encourage man-
agers to envision and test new opportunities beyond the core business: in its first six
years it commercialized thirty technologies and created three new businesses.
• Investing in start-ups—modest investments which may build a clear view of emerging
technologies and markets.
• Outsource—use consultants for fresh perspectives on the business to be incorporated
in strategic decision making.
One approach to presenting the result of scanning to executives is shown in Exhibit 5.1.
The market sensing grid can be used as a participative, cross-functional structure for
capturing insights from scanning (and other marketing information resources as they
EXHIBIT 5.1 Probability of the Event Occurring

A Grid for Market High Medium Low
Sensing 7
6 Field of
Utopia Dreams
Effect of the
Event on the 4 Things to
Company* Watch
2 Future
Danger Risks
* 1 = Disaster, 2 = Very bad, 3 = Bad, 4 = Neutral, 5 = Good, 6 = Very good, 7 = Ideal.
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become available). The process is to identify significant market events impacting on the
business (or part of it) over a three to five year period, and to position events by estimated
probability and impact. By including external views, such as these from suppliers, techno-
logy experts, distributors, and customers, it is possible to build a picture of the marketplace
that may challenge existing company beliefs and management assumptions, and identify
the highest priorities for further scanning and other information collection activities.28
Specific Marketing Research Studies

Marketing research is “the systematic gathering, recording, processing, and analyzing of
marketing data, which—when interpreted—will help the marketing executive to uncover
opportunities and to reduce risks in decision making.”29 Strategies for obtaining marketing
research information include collecting existing information, using standardized research
services, and conducting special research studies.
The starting point in undertaking specific marketing research studies is carefully defin-
ing the problem to be studied, indicating specific objectives, and determining what infor-
mation is needed to help solve the problem. A problem definition framework to guide
marketing research studies is shown in Exhibit 5.2.
Internal and External Marketing Information Resources
Marketing information resources exist internal to the company, as well as being collected
from external sources.
Internal Information Resources
The internal information system of the firm affects the extent and ease of the collection of
existing information. The nature and scope of the information and the information system
network will vary greatly from firm to firm and among industries. Even simple information
systems are able to generate analyses of sales and cost data. Many firms have extensive
internal information systems, or at least the capability to implement such systems. Recall
the new customer information resources being created by CRM systems (Chapter 4).
Major organizations maintain internal marketing research units to undertake studies
as required, although the trend in recent years has been to outsource at least part of the
research process to external providers (marketing research agencies).
External Information Resources
External marketing information resources include open source resources (freely avail-
able data on the Internet or in print sources), information services (paid-for, standardized
reports and databases), and specific studies undertaken by marketing research agencies and
consultants (for example, surveys of consumers). In the use of marketing research agencies
for specific studies, it is important for executives to carefully manage relationships with
these third-party providers of information resources.
EXHIBIT 5.2
Problem Definition Research
Research Research Planned
Project and
to Guide Marketing Scope
Objectives Questions Outcomes
Research Studies
Describe the topic Set specific goals for Identify the specific When completed how
for the study and the study - why is it pieces of information should the results be
the background. being undertaken? required and the presented for management
questions that need use?
to be asked to obtain
that information
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Relationships with External Marketing Research Providers

Marketing information providers are likely to be marketing research firms. In the global
marketing research industry in 2005, the top twenty-five marketing research firms had rev-
enues of $14.4 billion.30 These twenty-five organizations account for approximately two-
thirds of world expenditures through commercial firms for research purposes. Exhibit 5.3
shows the top ten agencies in 2005. Agency research is predominantly market measure-
ment studies, media audience research, and customer satisfaction measurement. Research
into the impact of the Internet on markets is growing rapidly.
With the increasing globalization of brands and international competition, growing
emphasis is being placed on a global perspective on marketing research. Particular inter-
est is being shown in research in China and India, but also Latin America and parts of
Africa, as well as eastern Europe and Russia. Particular problems in global research relate
to cross-cultural differences that impact on information quality and characteristics. For
example, an industry rule of thumb is that in the Americas the further North you go, the
more reserved consumers are in what they express. The same consumer perception of the
quality of a product might receive high scores in Latin America, average marks in the U.S.
and less favorable reviews in Canada, because of cultural differences. For companies in
international markets, making allowances for such cultural differences in examining global
marketing research is an important challenge.31
Research studies follow a step-by-step process beginning with defining the problem
to be investigated and the objectives of the research. A project proposal should indicate
the objectives, research method, sampling plan, method of analysis, and cost. In deciding
whether to undertake a special marketing research study and when interpreting the results,
several considerations are important:
• Defining the Problem. Care must be exercised in formulating the research problem. It
is essential to spell out exactly what information is needed to solve the problem. If this
cannot be done, exploratory research should be conducted to help define the research
EXHIBIT 5.3 Top Ten Global Marketing Research Firms in 2005

Source: Extracted from “Honomichl Global Top 25” Special Section of Marketing News, August 15, 2006, p. H4.
Global Research-
Global research only
Rank revenue full-time
2005 Organization Headquarters Web site ($ millions) employees
1 VNU NV Haarlem, vnu.com 3,537.9 37,884
Netherlands
2 Taylor Nelson London, UK tns-global.com 1,802.7 13,580
Sofres plc
3 IMS Health Inc Fairfield, Conn. imshealth.com 1,754.8 6,900
4 GfK AG Nuremburg, gfk.com 1,311.3 7,515
Germany
5 The Kantar Group Fairfield, Conn. kantargroup.com 1,237.2 6,600
6 Ipos Group SA Paris, France ipos.com 964.6 6,100
7 Information Chicago infores.com 624.0 3,604
Resources Inc
8 Synovate London, UK synovate.com 602.9 5,559
9 Westat Inc Rockville, Md westat.com 420.4 1,835
10 Arbitron Inc New York arbitron.com 310.0 1,057
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problem and determine the objectives of the project. Caution should be exercised to
avoid defining a symptom rather than the underlying problem—do falling sales reflect
declining market size, new competitive activity, or ineffective promotion? It is useful to
prepare a written statement of the research problem, specific objectives, the information
that is needed, information sources, and when the information is needed. When com-
panies contract with research firms to do the research, it is important that the supplier
be as familiar as possible with the problem to be studied. Management needs to clearly
define the intended project and may choose to involve the research supplier in defining
the problem. Failure to adequately define and clarify the problem to be studied may
undermine relationships between client and research agency.
• Understanding the Limitations of the Research. Most studies are unable to do eve-
rything that the user wishes to accomplish and also stay within the available budget.
Priorities for the information that is needed should be indicated. Also, obtaining cer-
tain information may not be feasible. For example, measuring the impact of advertising
on profits may not be possible due to the influence of many other factors on profits.
Research suppliers should be able to indicate the limitations that may exist for a par-
ticular project. Discussions with a potential supplier are advisable before making a final
commitment to the project. This will be useful in finalizing information need priorities.
• Quality of the Research. There are many challenges to obtaining sound research
results. The available evidence indicates that some studies are not well-designed and
implemented and may contain misleading results. Factors that affect the quality of study
results include the experience of the research personnel, skills in carefully managing
and controlling the data collection process, the size of the sample, the wording of ques-
tions, and how the data are analyzed.
• Costs. Customized research studies are frequently expensive. The factors that affect
study costs include sample size, the length of the questionnaire, and how the information
will be obtained. The complexity of the study objectives and the analysis methods also
increase the professional capabilities required in research personnel. Costs must be com-
pared carefully to the likely benefits of the research to executives in making decisions.
• Evaluating and Selecting Suppliers. When selecting a marketing research supplier,
it is useful to talk with prior clients to determine their satisfaction with the research
firm. It is also important to identify consultants who are experienced in conducting the
particular type of research needed by the user. Familiarity with the industry may also
be important. Spending some time in evaluating a potential research supplier is very
worthwhile. Experience and qualifications are important in selecting the supplier. Sev-
eral useful screening questions are shown in Exhibit 5.4. These could be used to evalu-
ate possible suppliers before asking for a detailed research proposal from the supplier.
• Research Methods. It is important to recognize that the research problem to be
addressed indicates the appropriateness of different research methods. Large-scale con-
sumer/company surveys may not be the most appropriate approach. Qualitative research
methods, rather than surveys and other quantitative methods may be more appropri-
ate in some circumstances. The use of focus groups is a typical way of collecting rich
qualitative data, as compared to the more representative information from a survey or
market test. For example, companies like Nokia use customer focus groups for several
purposes. Testing a new messaging product for the U.S. market involved small groups
giving individual feedback on product features, which were changed before the prod-
uct launch. The global positioning statement for the Nokia 3390 phone—“You Make
It You”—was created from unfavorable focus group reactions to company attempts to
describe positioning. 32
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EXHIBIT 5.4 Research agency screening issues:

Screening Potential
Marketing Research • Recommendations from other clients.
Suppliers • Industry and manager opinions about the agency.
• Agency size and resources.
• Agency experience in this type of marketing research.
• Agency online capabilities.
• Sub-contracting arrangements at the agency.
• Interviewer training and supervision.
• Arrangements for validating data collected, e.g., by interviewers.
• Quality of research instruments for the project, e.g., questionnaires.
• Adequate arrangements for sampling.
• Quality of reports produced for other clients (if not confidential).
• Warranties and guarantees provided.
Existing Marketing Information Sources

In-Company Resources
There is considerable value and potential in using the information in the organization’s
current system. This is essential for the strategic mission of the firm, as well as for efficient
utilization of assets. Information is a resource that needs to be consciously managed.33
Management should structure the information system to capture this resource and control
its use. Information is not a by-product of activities of the firm. It is a scarce, valuable
resource that affects the future success or failure of the firm. Management may not have
control over the actions of competitors or consumers, but an effective information system
provides a way to anticipate and react.
The product mix and the nature of business operations influence what type of inter-
nal marketing information system is appropriate in a particular firm. Nonetheless, elec-
tronic information systems are necessary in all kinds of companies. The system needs to be
designed to meet the information needs of the organization. Manufacturers have different
information requirements from retailers or wholesalers. The size and complexity of the
firm also influence the composition of the information system.
The costs and benefits of the information must be evaluated for both short-term and
long-term planning. Incremental efforts and expenditures in the early stages of creating an
internal information system may avoid future costly modifications. Achieving long-term
performance may require temporary losses to finance a system. It is critical to consider a
long-term perspective in evaluating information system decisions.
Harrah’s Entertainment is an example of a company developing market-led strategy on
the basis of existing information. Harrah’s operates twenty-six casinos in thirteen states
and in 2006 had more than $7 billion in revenue. In a sector known for fickle customers,
Harrah’s built a strategy based on customer loyalty. Harrah’s has used the data in their cus-
tomer loyalty program—the Total Gold card—to uncover consumer preferences based on
tracking the millions of individual transactions conducted. Harrah’s found that 26 percent
of their customers generated 82 percent of their revenues. These were not the high-rollers
targeted by competitors, they were former teachers, doctors, bankers and machinists—
middle-aged and senior adults with discretionary time and income who enjoy gambling.
They typically do not stay in casino hotels, but visit a casino on the way home from work
or on a weekend night out. They respond differently to marketing and promotions because
they enjoy the anticipation and excitement of gambling itself. Harrah’s strategy is one
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of providing visibly higher levels of service to the customers with greatest value to the
company. The transactional data can even be used to see which particular customers are
playing which slot machines and to identify what it was about the particular machine that
appealed to them. Harrah’s successful strategy is driven by leveraging an existing informa-
tion source to build competitive differentiation.34
Open Source Resources

A wide variety of information resources exist in the form of published information which
can be accessed freely or at low cost. Government and international agencies provide
valuable statistical sources in such areas as population trends, economic development,
household purchasing, and international market differences. Universities, private research
firms, industry and trade organizations, and consultants often publish useful informa-
tion. Frequently these resources can be accessed online. For example, the World Bank
(www.worldbank.com) and the U.S. Central Intelligence Agency publication The World
Factbook (www.cia.gov/library) both provide concise and high quality data on the eco-
nomic performance, governmental characteristics, communications, and infrastructure for
the majority of countries in the world.
The Internet also provides a more general search facility, using Google or Yahoo, to
identify sources of information on topics of interest, and online databases like Wikipedia,
the online encyclopedia, can indicate prior research conducted on the topic of interest and
further sources of information. While charges may apply to access some proprietary data-
bases, many are available for no cost.
Some care is needed to evaluate the quality and objectivity of Internet information
sources, but they should not be ignored as a marketing information resource.
Research Agency Resources

A wide variety of marketing information is available for purchase in special publications
and on a subscription basis. A key advantage to the standardized information in these
resources is that the costs of collection and analysis are shared by many users. The major
limitation is that the information may not correspond well with the user’s individual needs.
Many services allow online access to data, enabling subscribers to automatically input
external information into their own information systems.
Many standardized information services are available to meet a wide range of decision
making needs. Some examples follow:35
Nielsen Media Research (www.nielsenmedia.com), part of the VNU Group, collects infor-
mation on television audience measurement, with measurement meters in 10,000 U.S. homes
assessing the viewing habits of 26,000 individuals. Measurement is provided through People
Meters, set-tuning meters and diaries. More specialized measurements include Hispanic TV
viewing in the U.S. Similar services are provided in other countries.
HIS Energy supplies information on drilling and production for firms interested in oil and
gas exploration activities around the world (energy.his.com).
VNU Marketing Information group (including ACNielsen) provides retail measurement serv-
ices (tracking product sales instore), consumer panel data (tracking the purchase behavior of
more than 265,000 households in twenty-seven countries, mainly through the use of in-home
scanners), and retailer services relating to instore effectiveness (www.vnu.com).
Using the large data banks collected and organized by these services, many different
analyses can be made, depending on a company’s information needs. The cost of gathering
the information for use by one company would be prohibitive. By sharing the databases, a
wide range of company information needs can be met.
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Creating New Marketing Information

When existing marketing information resources do not address executives’ research needs,
then it may be necessary to collect new information. Approaches may include observation
and ethnographic studies, quantitative research surveys, or Internet-based data collection.
These data collection methods may require marketing research agency resources or be
carried out by analysts inside the company.
Observation and Ethnographic Studies

Studies involving observation include, for example, counting customer traffic flows in a
retail store, measuring waiting times for service in a shop, or the reaction of exhibition
visitors to display stands.
Considerable attention is being given to the use of ethnographic approaches in
collecting marketing information. Research suggests that it may be mistaken for executives
to assume that consumers think in a well-reasoned or rational way, or that they can readily
explain their thinking and behavior.36 Accordingly, asking customers direct questions
may give misleading results, and observational techniques like ethnography may be more
insightful.
Ethnography is a social science based on anthropology, and its use in marketing studies
is based on the idea that richer information and insight can be generated by immersion in
the consumer’s life. For example, a Henley Center project for a radio station called Modal
Targeting highlighted the different modes that listeners go through during the day, to estab-
lish when they would be most receptive to different types of messages. Another ethnogra-
phy project examined the behavior of parents and children shopping together by observing
them in stores and recording basic information such as what they said to each other.37
When WD-40 wanted to reposition a product line as essential bathroom cleaners, the
company undertook open-ended research to try to understand how consumers clean and
how they shop. In-home ethnographies and focus groups examined consumer cleaning
habits and product usage. They found consumers engage in two types of cleaning: weekly
deep cleans and quick daily cleaning, and liked the idea of a brand focused on the bath-
room. The brand’s new positioning—X14 as The Bathroom Expert—and its competitive
differentiation, come directly from insights into how people clean.38
There are a growing number of cases where traditional research approaches have failed
to identify the insights important to new marketing strategy initiatives, but where qualita-
tive, ethnographic research has proved effective:
Marriott used an ethnographic research agency to rethink the hotel experience for an increas-
ingly important customer segment: the young, technology sophisticated “road warrior.”
A team including a designer, an anthropologist, a writer, and an architect spend six weeks
touring hotels in twelve cities. They loitered in hotel lobbies, cafes, and bars, and asked
guests to graph what they were doing hour by hour. The findings were: hotels are generally
good at serving large parties, but not small groups of business travelers; hotel lobbies tend to
be dark and poorly designed for doing business; Marriott lacked places where guests could
comfortably combine work with pleasure outside their rooms. The result was the reinvention
of the lobbies of Marriott and Renaissance Hotels, creating for each a social zone, with small
tables, brighter lights and wireless Web access. Another area allows solo travelers to work in
larger, quiet, semiprivate spaces.
General Electric used ethnographic research to develop its competitive positioning in the
plastic fibers business—providing material for high value products like fire-retardant jackets
and bulletproof vests. Researchers interviewed presidents, managers, and engineers at textile
makers, touring their offices and photographing their plants. One major insight caused GE to
rethink their strategy: GE thought that the fibers industry was a commodity business based
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on obtaining the cheapest materials. What it found instead was an artisan-based industry
where customers wanted to collaborate from the earliest stages to develop high-performance
materials—these are people with curiosity who like to get their hands dirty. GE now shares
prototypes with customers, by-passing executives and working closely with engineers on
technical questions. A considerable advantage has been achieved in access to a new market.39
Intel used ethnographic research to examine the use of computers by children in China. The
work involved a two-and-a-half year study of Asian families in seven countries, examining
their lives and values. In the U.S. the conventional parents’ belief is that a child should be
bought a computer in the early stage of his/her development—exposing the child to comput-
ing at the earliest age. In China, parents believe the opposite—they want children to learn
Mandarin, and the computer is a distraction from this. This insight led Intel designers to
launch a PC aimed at the Chinese home educational market, which has a touch-sensitive
screen that allows users to write in Mandarin, tracing the order in which the character is
being written (correct stroke order being an important part of the learning process). Chinese
parents also had misgivings about allowing children unlimited Internet access. Locks and
keys are important symbols of authority in China. Instead of installing a software-based key
on the PC, Intel included a physical locking mechanism, visible elsewhere in the room, and
reassuring to parents.40
The strength of qualitative research, such as ethnography, is in the richness of the data,
which can create important insights into the market. The weakness is that the small num-
bers of subjects studied means that it is difficult to know if the results are representative of
the wider market. Qualitative approaches of this kind may be followed by more conven-
tional, quantitative studies to confirm and validate findings.
Research Surveys
Research surveys are initiated in response to problems or special information needs. Exam-
ples include market segmentation, new-product concept tests, product use tests, brand-
name research, and advertising recall tests. Studies use field surveys involving personal,
phone, or mail interviews with respondents who represent target populations.
For example, the mid-2000s saw Wal-Mart advertising its new Metro 7 fashion range in
Vogue magazine and participating in the New York Fashion Week. The Metro 7 initiative
reflects the findings of a survey of 6,000 consumers. The research survey established that
a significant number of customers wanted more from their Wal-Mart store—they wanted
more fashionable, contemporary style clothes. The opportunity was with the 25 to 45 year
old Wal-Mart shopper, who was not necessarily more affluent than others, but who spent
more on trendy fashion. After years of relying on its “Always Low Prices—Always” strat-
egy, and leaving consumer research to suppliers, weak sales growth is driving Wal-Mart
to build a new market research and consumer insights competency within the business to
enhance the ability to adapt to market change and identify new opportunities.41
Internet-Based Research
The impact of Internet resources on the ability to collect new market information is consid-
erable. New and speedy ways of conducting studies using electronic questionnaires, e-mail
questionnaires, and electronic panels are expanding rapidly. Expenditure on Internet-
based marketing research now exceeds $1.2 billion annually.42 The ability to evaluate
customer feedback and monitor customer Web-based behavior can also provide insights
and identify new opportunities (scanning). The INTERNET FEATURE summarizes some
major impacts of the Internet on marketing information collection.
Online market research services offer less expensive and more rapidly available mar-
ket research surveys. For example, InsightExpress provides clients with a survey template
to build an online questionnaire, allowing them to sample from a panel of 100 million
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Internet Feature The Web and Marketing Information

Online Surveys
• Surveys based on the Internet are a fast and inexpensive way to generate feedback on
products and marketing communications. Limitations are that only online customers
can participate and there is growing resistance to unsolicited marketing messages and
spam among Web users.
• They may use tools companies already have at hand—the Web site, targeted e-mails,
e-mail blasts, or other formats like Personal Digital Assistants.
• The only cost for the research may be employee time in writing the survey and posting
it. Cheaply available self-service Web tools like Zoomerang or SurveyMonkey allow users
to type in questions and click on the survey report.
• Companies unable to fund traditional marketing research can now afford to survey cus-
tomers and uncover new business opportunities at low cost.
Customer Feedback and Peer-to-Peer Web Communication
• Some companies have designed online systems to allow consumers to voice opinions
and describe experiences and evaluations of products and services.
• Online customer feedback is a form of digitized word-of-mouth communication.
• Channels for online feedback include message boards, discussion forums, opinion
forums, newsgroups, and chat rooms.
• There are a growing number of independent online goods and service review forums,
such as Epinions.com and Rateitall.com, where buyers pool product assessments on a
peer-to-peer basis.
Monitoring Customer Web Behavior
• Controversially, there has been a major increase in the use of spyware and adware
among Internet companies. Many have ethical reservations about this technology and
some user reactions are hostile.
• Spyware and adware are cookies that users download from the Internet—some say often
unwittingly and without intention—that hide themselves on the user’s hard drive.
• Spyware collects personal data and tracks the user’s Web site use, while adware observes
Web visits and provides relevant pop-up ads based on the user’s Internet use.
Sources: Ben Elgin, “Guess What—You Asked for Those Pop-Up Ads,” BusinessWeek, June 28, 2004, 88–90;
Catherine Arnold, “Cast Your Net,” Marketing News, Nov. 24, 2003, 15–19; Robin T. Peterson and Zhilin
Yang, “Web Product Reviews Help Strategy,” Marketing News, April 1, 2004, 18–20.
with a patented sampling methodology, pay by credit card, and download results within
a few days. An online research project may cost a small fraction of a traditional research
project. Ice cream company Ben & Jerry’s is an Insight Express client which trans-
ferred to online research because traditional data collection was too slow. An in-house
database of Ben & Jerry’s loyal customers is sampled alongside an Insight Express
panel to test new flavors and new products. Reservations exist regarding the quality
of the data produced by online services, but they provide a cheap route to sensing the
market quickly.
Useful insights can also be built by examining customer online behavior. The key words
entered into search engines like Google, MSN, and Yahoo provide an insight into com-
petitive preferences and purchase intentions, bearing in mind that nearly 80 percent of all
online purchases start at a major search engine. User clicks on a company’s website can be
counted to identify successful promotions and cross-sells between products. The website
can be used as a platform for experimentation—comparing the impact of alternate content
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on site visitors. The importance of online research of this kind is underlined by customer
multiple channel behavior—it is estimated that almost 90 percent of online shoppers actu-
ally complete their purchase by buying offline at the store.43
For example, Anglo-Dutch food and personal products company Unilever spends around
$400 million a year on marketing research. It now conducts more than 80 percent of its
U.S. research online. The policy is to exploit the speed and low cost of the Web to research
consumer behavior. Unilever’s estimate is that the Web is 10 to 20 percent cheaper than
traditional data collection methods. The company expects increasingly to shift to Internet
projects in other countries—the trigger is when a minimum of half the population has
Internet access. Unilever data testing suggests Internet responses were more honest than
those produced by traditional methods, and the company is moving from brand research
into more strategic work in Internet research projects.44
Marketing and Management Information Systems

Enhanced technology capabilities have led many companies to invest in formalized infor-
mation systems to exploit their data resources. Important issues include the establish-
ment of specialized marketing information systems, as well as more general management
information systems and the potentials for marketing decision support systems and expert
systems.
Marketing Information Systems

The marketing information system provides a mechanism for integrating marketing infor-
mation and intelligence resources. A marketing information system “consists of people,
equipment, and procedures to gather sort, analyze, evaluate and distribute needed, timely,
and accurate information to marketing decision makers.” It is developed from internal
company records, marketing intelligence activities, and marketing research.45
Importantly, while companies have invested heavily in developing information systems,
inward-oriented firms emphasize enhanced operating efficiency and reduced costs through
automating information processing. The market-oriented firm, however, looks for ways in
which information systems can make the firm more effective in the marketplace.46
Databases are a particularly relevant form of information resource, frequently supported
by CRM systems. For example, in its European retail operation, supermarket Tesco uses its
loyalty club data to indicate demographic, income, and housing characteristics of consum-
ers in the catchment area of a store to design appropriate product assortments—stores near
large universities may concentrate on high-value ready-meal replacements from pizzas to
take-away, pre-cooked curries, while stores in family residential areas emphasize extensive
food choices, cooking ingredients and products for babies and children. Recall the growing
role of Customer Relationship Management (CRM) technology in building new databases
(Chapter 4)—or data warehouses—from the company’s own customer contacts. These new
data sources are the focus of many data mining exercises and can create new insights into
customer behavior.
Companies vary considerably in the degree and way to which they have formalized mar-
keting information systems. It is useful to consider the nature of more general management
information systems and moves towards the development of marketing decision-support
systems for additional insight. The marketing information system may operate as an inde-
pendent entity, or as a component of the more general management information system.
Management Information Systems

Management information systems (MIS) provide raw data to decision makers throughout
a firm. The system collects data on the transactions and operations of the firm and
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may include competitor and environmental information. The decision makers (and
systems analysts) are responsible for extracting the data relevant for a decision and in
the appropriate format to facilitate the process. The system can provide information for
decisions at all levels of the organization. Lower and middle-level managers are likely
to use the system most often for operating decisions. The system may generate routine
reports for frequent operating decisions, such as weekly sales by product, or may be
queried for special analyses on an as-needed basis. Non-routine decisions may consist
of tracking the sales performance of a sales district over several months, determining the
number of customer returns for a particular good, or listing all customers or suppliers
within a given geographic area. The basic MIS collects data and allows for retrieval and
manipulation of format in an organized manner. Typically, the MIS does not interact in
the decision making process. More advanced MIS capabilities provide important decision
analysis capabilities.
Marketing Decision-Support Systems

A decision-support system (DSS) assists in the decision making process using the infor-
mation captured by the MIS. A marketing decision-support system (MDSS) integrates data
that are not easily found, assimilated, formatted, or readily manipulated with software and
hardware into a decision making process that provides the marketing decision maker with
assistance when needed.47 The MDSS allows the user flexibility in applications and in for-
mat. A MDSS can be used for various levels of decision making ranging from determining
reorder points for inventory to launching a new product.
MDSSs may operate autonomously or instead may require interaction with the decision
maker during the process. There may be several stages before a recommendation is formed
where the decision maker responds to queries to refine the scenario. Thus, an interactive
MDSS requires more assistance from the decision maker and has more room for variation
than an autonomous MDSS. The system is dependent on the quality and accuracy of the
information and assumptions that are used in designing the system. The process should be
viewed as a tool to assist in decision making and is not a final product in itself.
Expert systems are an extension of decision support systems and apply a variety of
sophisticated models to make inferences from a knowledge base, which are significant to
marketing decisions.48 These tools have considerable potential for leveraging the value of
marketing information.
Marketing Intelligence and Knowledge Management

Extracting the maximum sensing and learning value from marketing information resources
is enhanced by efforts to develop formal information systems. However, in the pursuit of
this goal, increasing attention is also being given to active marketing intelligence gathering
and knowledge management approaches. The potential for a chief knowledge officer to
manage learning processes is a relevant development, with the goal of leveraging customer
knowledge for competitive advantage.
Marketing Intelligence
Importantly, we have shown that the emphasis on market sensing in market-driven com-
panies does not rely on hard data alone. For example, many companies have invested in
in-company intelligence units to co-ordinate and disseminate “soft” or qualitative data and
improve shared corporate knowledge.49 Intelligence may come from published materials
in trade and scientific journals, salesperson visit reports, programs of customer visits by
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executives, social contacts, feedback from trade exhibitions and personal contacts, or even
rumor in the marketplace. Formal marketing intelligence gathering activities may be an
important element of the scanning processes we discussed earlier.
Knowledge Management
There is increasing recognition that knowledge about customers should be managed as a
strategic asset, because competitive advantage can be created by not merely possessing
current market information but by knowing how to use it. Market knowledge is inextricably
linked to organizational learning and market orientation in the market-driven company.50
Peter Drucker argues, for example, that often 90 percent of the information that compa-
nies collect is internal—market research and management reports that only tell executives
about their own company—while the real challenge is to build knowledge about new mar-
kets they do not yet serve and new technologies they do not yet possess.51 Knowledge that
builds competitive advantage involves major emphasis on rigorous customer perspectives
and competitor comparisons.52
Role of the Chief Knowledge Officer
To meet this challenge, some companies have established positions with titles such as chief
knowledge officer or chief learning officer. While the titles and the job responsibilities
vary, all appear linked to improving an organization’s knowledge management and learn-
ing processes. The chief knowledge/learning manager role may be a staff position with
only a small number of personnel involved, or a broader role with responsibility for build-
ing infrastructure and related knowledge management functions.53 The position may report
to the chief executive officer, information officer or other high level executive. Companies
that have these positions include Ernst & Young, IBM, and the World Bank.
Other organizations have developed a management role described as a chief learning
officer, with a more general role in developing and enhancing company-wide learning
processes. For example, Shell Oil has appointed a head of global learning to stimulate indi-
vidual and organizational skills in learning focused on business improvement.54 Interest-
ingly, the Shell initiative underlines the cross-functional nature of organizational learning
processes, and the potential role of human resource development functions in working with
departments like marketing to enhance learning processes.
While there appear to be differences between the role and functions of knowledge and
learning officers, both positions do not occur in the same company.55 Knowledge manage-
ment is concerned with knowledge (information) collection and linking information within
the organization. While the future of the position is not clear, as it develops there is likely
to be a relationship between knowledge management and the discussion in this chapter of
continuous learning about markets.
For example, Xerox claims a saving of $200 million from a single project that uncov-
ered and shared expertise across the group. Internal benchmarking found its Austrian sub-
sidiary was unusually successful at persuading customers to renew contracts. Sharing the
Austrian approach with other groups brought 70 percent up to the Austrian standard in
three months.56
Leveraging Customer Knowledge
One study is illustrative of methods being employed by companies to improve the avail-
ability and use of customer knowledge in impacting strategic decisions.57
Creating “Customer Knowledge Development Dialogues”
For example, Chrysler’s Jeep division runs customer events called “Jeep Jamborees,”
attracting enthusiasts for the vehicle. Jeep employees connect with customers through
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informal conversations and semi-formal round-tables. Engineers and ethnographic re-

searchers focus on the Jeep owner’s relationship with the vehicle, driving changes to exist-
ing models and plans for new models.
Operating Enterprise-Wide “Customer Knowledge Communities”

IBM, for example, uses collaborative Internet workspace called the CustomerRoom with
major accounts, where individuals throughout its divisions and functions can exchange
knowledge with each other and with the customer.
Capturing Customer Knowledge at the Point of Customer Contact

Customer Relationship Management systems capture customer behavior and response
information which offers rich potential for better insights into issues like customer defec-
tion and competitors’ strengths, as well as emerging customer needs and perceptions.
Management Commitment to Customer Knowledge

Management responsibility includes investing resources, time, and attention in maintain-
ing customer dialogs and communities as a commitment to enhanced organizational
understanding of the customer. For example, the Vice President of Marketing at Ford’s
LincolnMercury division actively participates in customer-related chatrooms on the Inter-
net and encourages other employees to follow this lead. Other approaches include planned
programs of customer visits for cross-functional teams of executives as a systematic way of
acquiring customer information, but also building superior understanding and responsive-
ness to customer perspectives.58
Ethical Issues in Collecting and Using Information

Lastly, important privacy and ethical issues concerning the role of information in the
organization need to be assessed by managers and professionals. Questions regarding ethi-
cal and socially responsible behavior are escalating in importance for individual executives
and organizations. These questions may impact particularly on approaches to collecting
customer information, and the uses made of that information.
Invasion of Customer Privacy

The dramatic increase in use of databases has generated concerns about the invasion of pri-
vacy of individuals. Companies have responded to the issue by asking customers to indicate
their preferences concerning mailing lists and other uses of the information. Nonetheless,
concerns about this issue will undoubtedly continue as the sophistication of communica-
tions technology and software continues to develop.
Consider, for example, the use of patient information in the drug industry. Data-
base marketing by pharmaceutical companies is guided by information obtained from
toll-free number calls, subscription to magazines, and pharmacy questionnaires.59 This
information can be used to guide database marketing programs, targeting people with
specific health concerns such as depression, arthritis, and other problems. Some patients
are objecting about the use of their prescription data to guide direct mail and other pro-
motional efforts. Yet further objections relate to the possible sharing of medical infor-
mation databases of this kind with other parties, such as insurance companies who may
want to determine premiums on the basis of health data for existing patients and their
children.
Indeed, public concern about identity theft abuses surrounding companies holding and
selling personal information is leading to greater regulatory control of individual information
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use.60 Further privacy dilemmas are raised, for example, by the potential for using Radio
Frequency Identification (RFID) tags to monitor consumer products throughout their
life—RFID tags in clothes could be used to track the wearer’s movements and activities
throughout the life of the apparel. While the data possibilities are rich, concerns exist over
invasion of privacy and inappropriate use of the data collected.61 Although the Google
search engine generates rich and valuable data about individuals’ Web behavior of consid-
erable relevance to advertising and marketing decisions, critics are concerned that Google
has unwittingly created a form of privatized surveillance well suited to government use in
countries like China.62 Companies have responded to the mood of the public concerning
environmentalism and ethical consumerism, and individual privacy rights may also be a
leading issue.
Information and Ethics

Related to the issue of invasion of privacy is the issue of how companies and research
suppliers should respond to ethical issues. For example, should a prospective client share
a supplier’s detailed project proposal with a competing supplier? A central issue concerns
which organization pays for the cost of preparing the proposal. If the proposal is prepared
at the expense of the supplier, then the proposal is the property of the supplier.63 Sharing
the proposal with its competition would be an issue of questionable ethics.
Other issues relate to the ways in which information is collected and from whom it is
collected. There are major professional restrictions, for example, on collecting market-
ing information from children. The possible use of Internet chat-rooms to create dia-
logues with child consumers avoids conventional restrictions, but poses a substantial
ethical dilemma for executives presented with such data, as well as risks to corporate
reputation.
In terms of the dilemmas which may emerge in how information is collected, consider
the use of medical brain scanning technology to capture clues as to consumer product
preferences and reactions to marketing messages described in the ETHICS FEATURE.
The use of brain scanning technology promises very useful marketing information. Brain
scanning studies have examined: predicting memory recall based on the amount of mem-
ory encoding taking place when a person scans a product or package; comparing brain
responses to new products compared to existing versions; providing quantitative evaluation
of the memorability and comprehensibility of advertisements placed in different media;
providing flavor and fragrance houses with physiological evidence that their flavors and
fragrances really do induce the mood swings they claim.64 Executives face difficult issues
in deciding if “neuromarketing” is an acceptable use of medical technology or whether it
breaches the individual’s right to privacy.
Information sharing with research suppliers, other external contractors, strategic alli-
ance partners, and acquisition/merger prospects often involves highly confidential infor-
mation. There are many possible situations that present ethical questions and concerns.
Companies normally sign confidentiality agreements. Nonetheless, revealing trade secrets
is a risk that relies primarily on the ethical behavior of the participants. Moreover, these
situations offer excellent opportunities for learning.
Importantly, the generation, collection, and application of intelligence and informa-
tion resources in strategic marketing must be conducted within a framework provided by
corporate ethical guidelines and social responsibility initiatives, as well as the individual
ethical standards of executives, and the expectations of stakeholder groups like sharehold-
ers and employees. Attention to the appropriateness of behavior in this area is a growing
concern.
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Ethics Feature Neuromarketing

• Medical research has created the magnetic resonance imaging (MRI) scanner to detect
injury and disease associated with the brain. Some suggest these should be redefined as
“market research imaging” machines.
• More recent MRI technology and software allows the machine to picture the flow of
blood in the brain in response to visual stimuli—almost a picture of thoughts pinpoint-
ing what part of the brain recognizes things, enabling researchers to understand better
the very essence of the mind and how it thinks, decides and feels. This is “functional”
MRI technology (fMRI).
• A controversial use of fMRI is probing customer preferences—sometimes called
“neuromarketing”—researchers at Harvard, Emory, Caltech and Baylor are studying how
consumer preferences for different kinds of products track with activity in different parts
of the brain, as well as reactions to marketing messages.
• A new company in California offers a service to Hollywood studios to test audiences as
they watch movie trailers to see which generate the most “brain buzz.”
• Consumer watchdog Gary Ruskin complains “it’s wrong to use a medical technology for
marketing, not healing.”
• Other ethical concerns include the issue of privacy.
• Prominent neurobiologist Donald Kennedy, former head of the U.S. Food and Drug
Administration, urges caution in collecting brain data: “Our brains are us, marking out
the special character of our personal capacities, emotions and convictions . . . As to my
brainome, I don’t want anyone to know it for any purpose whatsoever.”
• A further issue is whether brain scan data should be made available to insurers, employ-
ers, and even law enforcement agencies.
Source: Joan O’C. Hamilton, “Journey to the Center of the Mind,” BusinessWeek, April 19, 2004, 66–67. Aili
McConnon, “If Only I Had a Brain to Scan,” BusinessWeek, January 22, 2007, 19.
Summary Developing and enhancing market learning processes are critical activities in the market
oriented company and underpin the development of effective market-driven strategies.
Responding effectively to fast-changing markets and intense competition demands deep
customer knowledge and insight. Market knowledge management is a core capability for
companies pursuing a market-driven approach to strategy.
Market sensing processes are the foundation of the learning organization for develop-
ing competitive advantage from superior customer understanding. The basis for superior
customer knowledge is a range of marketing information and knowledge resources. These
resources include active scanning processes, as well as specific marketing research stud-
ies. Information and intelligence resources are both internal to the company and external
in the marketplace, and both require management attention. Where external information
resources are accessed through the use of a marketing research agency, careful attention
needs to be paid to managing the relationship with the information provider.
A useful distinction is between existing and new information resources. Existing
resources include in-company records, open source resources like online databases, and
published research agency studies. Creating new marketing information may involve
observation and ethnographic studies, research surveys, and Internet-based research. Mar-
keting and management information systems provide frameworks for integrating informa-
tion resources and displaying them to decision makers.
Underpinning the effective management of market learning processes are active
approaches to marketing intelligence gathering and to knowledge management. The role of
151
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the chief knowledge officer or the chief learning officer is becoming increasingly relevant
to developments in developing a company’s learning capabilities. The goal is leveraging
customer knowledge effectively.
There is growing attention to the ethical issues surrounding the collection and use of
market and customer information. Individual rights to privacy, information sharing, col-
lecting data from the vulnerable, and invasive data collection approaches are illustrative.
Corporate ethical frameworks and the ethical standards of individual executives are impor-
tant in ensuring responsible behavior in this area.
Questions for 1. Discuss how an organization’s marketing information skills and resources contribute to its
distinctive capabilities.
Review and 2. How would you explain to a group of top-level executives the relationship between market-
Discussion orientation and continuous learning about markets?
3. Outline an approach to developing an effective market sensing capability for a regional full-
service bank.
4. Compare and contrast the use of standardized information services as an alternative to special
research studies for tracking the performance of a new packaged food product.
5. Suppose the management of a retail floor covering (carpet, tile, wood) chain is considering
a research study to measure household awareness of the retail chain, reactions to various
aspects of wallpaper purchase and use, and identification of competing firms. How could
management estimate the benefits of such a study in order to determine if the study should be
conducted?
6. Are there similarities between marketing intelligence and the operations of the U.S. Central
Intelligence Agency? Do companies ever employ business spies?
7. What obstacles may be faced in enhancing a company’s ability to learn more and better about its
customers, and how should they be addressed?
8. Why would a company consider observational or ethnographic research in preference to conven-
tional surveys?
9. Data mining from databases is receiving increased attention in many companies. Discuss the
underlying logic of data mining.
10. What are the relevant issues that need to be considered when obtaining the services of an outside
supplier for a marketing research project?
11. What do you consider to be the proper ethical limits on the collection and use of customer infor-
mation by companies?
Internet A. Revisit the list of major marketing research agencies in Exhibit 5.3. Visit several of the websites
listed. Examine the major types of information provided both as standardized services and spe-
Applications cial study capabilities. List these and identify the ways in which such resources can impact on
marketing decisions.
B. Select a well-known company or brand and use a search engine to find Web pages that include
its name. Review the content of blogs and online reviews, and examine the lessons that the
company should learn from this feedback. Discuss the impact of Internet-based information on
traditional ideas about confidentiality and privacy.
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Feature A. Revisit the INTERNET FEATURE “The Web and Marketing Information.” What are the major
advantages of the Web in developing marketing information resources, and what are the poten-
Applications tial disadvantages? How do these two lists balance against each other?
B. Examine the marketing information example described in the ETHICS FEATURE “Neuro-
marketing.” Should limits be placed on the ability of commercial organizations to capture and
exploit information about individuals for reasons of privacy? Why should such issues concern
marketing executives?
Notes 1. George S. Day, “The Capabilities of Market-Driven Organizations,” Journal of Marketing,

October 1994, 43.
2. Kathleen M. Sutcliffe and Klaus Weber, “The High Cost of Accurate Knowledge,” Harvard
Business Review, May 2003, 74–82.
3. Francesco Guerrera, “US Groups ‘Fail to Understand Customer Needs,’ ” Financial Times,
Monday, June 5, 2006, 27.
4. This illustration is adapted from: Andrew Davidson, “The Razor-Sharp P&G Boss,” The
Sunday Times, December 3, 2006, 3–6. Neil Buckley, “The Power of Original Thinking,”
Financial Times, Friday, January 14, 2005, 11. Alan Mitchell, “P&G Takes Hoppers to
Another World in the War of the Brands,” Financial Times, Wednesday, October 18, 2006, 10.
Lisa Cornwell, “P&G Launches Two Social Networking Sites,” Marketing News, February 1,
2007, 21.
5. Allison Enright, “Boeing by Design,” Marketing News, October 1, 2005, 10.
6. Peter Marsh, “Skills Sharing Fires Up Performance,” Financial Times, Thursday, September 15,
2005, 19.
7. George S. Day, “Managing the Market Learning Process,” Journal of Business and Industrial
Marketing, Vol. 17 No. 4 2002, 240–252.
8. George S. Day, “The Capabilities of Market-Driven Organizations,” Journal of Marketing,
Vol. 56 October 1994, 37–52.
9. Stanley F. Slater and John C. Narver, “Market Orientation, Customer Value, and Superior
Performance,” Business Horizons, March/April 1994, 22–27.
10. George S. Day, “Managing the Market Learning Process,” Journal of Business and Industrial
Marketing, Vol. 17 No. 4 2002, 240–252.
11. This illustration is based on Adrian Slywotsky and Karl Weber, The Upside: From Risk Taking to
Risk Shaping (New York: Crown Business, 2007).
12. Ibid., 71.
13. Ibid.
14. Steve Hamm, “Speed Demons,” BusinessWeek, March 27, 2006, 67–76.
15. Michael Fielding, “Special Delivery: UPS Conducts Surveys to Help Customers Export to
China,” Marketing News, February 1, 2007, 13.
16. The following discussion is based on Day, “The Capabilities of Market-Driven Organizations.”
See also Stanley F. Slater and John C. Narver, “Market-Oriented Isn’t Enough: Build a Learning
Organization,” Report No. 94–103, Cambridge, MA: Marketing Science Institute, 1994.
17. Nigel F. Piercy and Nikala Lane, “Marketing Implementation: Building and Sustaining a Real
Market Understanding,” Journal of Marketing Practice: Applied Marketing Science, Vol. 2 No. 3
1996, 15–28.
18. Adrian J. Slywotzky, Value Migration (Boston: Harvard Business School Press, 1996).
19. Philip B. Evans and Thomas S. Wurster, “Strategy and the New Economics of Information,”
Harvard Business Review, September–October 1997, 70–82. See also, Philip Evans and Thomas
S. Wurster, Blown To Bits: How the New Economics of Information Transforms Strategy (Boston,
MA: Harvard Business School Press, 2000).
20. Day, “The Capabilities of Market-Driven Organizations,” 43.
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21. Donald Sull, Why Good Companies Go Bad and How Great Managers Remake Them
(Cambridge MA: Harvard Business School Press, 2005).
22. Peter Lorange, “Memo to Marketing,” Sloan Management Review, Winter 2005, 16–20.
23. George S. Day and Paul J. H. Shoemaker, “Scanning the Periphery,” Harvard Business Review,
November 2005, 135–148.
24. Clayton M. Christensen, Scott D. Anthony and Erik A. Roth, “Seeing What’s Next: Using the
Theories of Innovation to Predict Industry Change” (Boston MA: Harvard Business School
Press, 2004).
25. Allison Enright, “Listen Learn: Net Chatter Coverage Yields Valuable Insight,” Marketing News,
April 1, 2007, 25.
26. Jonathan Birchall, “Retailers Give Customers the Final Word,” Financial Times, Friday, October 6,
2006, 13.
27. This illustration is adapted from George S. Day and Paul J. H. Shoemaker, “Scanning the
Periphery,” Harvard Business Review, November 2005, 135–148.
28. Nigel F. Piercy and Nikala Lane, “Marketing Implementation: Building and Sustaining a Real
Market Understanding,” Journal of Marketing Practice: Applied Marketing Science, Vol. 2 No. 3
2006, 15–28.
29. William R. Dillon, Thomas J. Madden, and Neil H. Firtle, Marketing Research in a Marketing
Environment, 3rd ed. (Homewood, IL: Richard D. Irwin, 1994), 737.
30. Jack Honomichl, “No Great Gains,” Marketing News, August 15, 2006, H54.
31. Catherine Arnold, “Global Perspective,” Marketing News, May 15, 2004, 43.
32. Deborah L. Vence, “Turned on a Dime,” Marketing News, March 15, 2004.
33. Kenneth C. Laudon and Jane Price Laudon, Management Information Systems (New York:
Macmillan, 1988), 235.
34. Gary Loveman, “Diamonds in the Data Mine,” Harvard Business Review, May 2003, 109–113.
35. A description of the top twenty-five companies in the global marketing research industry can be
found in the “Honomichi Global 25” Special Section of the Marketing News, August 15, 2005,
H1–H62.
36. Gerald Zaltman, How Customers Think: Essential Insights into the Mind of the Market (Boston
MA: Harvard Business School Press, 2003).
37. Rupert Steiner, “Homing In on Consumers,” Sunday Times, August 25, 2002, 3–8.
38. Michael Fielding, “A Clean Slate,” Marketing News, May 1, 2007, 9.
39. Spencer E. Ante, “The Science of Desire,” Business Week, June 5, 2006, 98–106.
40. Kim Thomas, “Anthropologists Get to the Bottom of Customers’ Needs,” Financial Times,
Wednesday, August 24, 2005, 9.
41. Jonathan Birchall, “What Wal-Mart Women Really Really Want,” Financial Times, Monday,
October 10, 2005, 11.
42. Allison Enright, “Web Consumer Habits Yield Real-World Results,” Marketing News,
November 1, 2006, 20.
43. Eric J Hansen, “Apply Online Market Data for Offline Insights,” Marketing News, April 1, 2007, 30.
44. Carlos Grande, “Unilever to Cash In on Benefits of Web Research,” Financial Times, Tuesday,
April 17, 2007, 18.
45. Philip Kotler and Kevin Lane Keller, A Framework for Marketing Management, 3rd ed. (Upper
Saddle River NJ: Pearson/Prentice-Hall, 2007), 41.
46. Noel Capon and James M. Hulbert, Marketing Management in the 21st Century (Upper Saddle
River, NJ: Prentice-Hall, 2001).
47. Nikolaos F. Matsatsinis and Y. Siskos, Intelligent Support Systems for Marketing Decisions
(New York: Springer, 2002). Berend Wierenga and Gerrit van Bruggen, Marketing Management
Support Systems: Principles, Tools and Implementation (New York: Springer, 2000).
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48. Arvind Rangaswamy, Raymond R. Burke, Jerry Wind and Jehoshua Eliashberg, Expert Systems
for Marketing, Marketing Science Institute Working Paper 87–107, Cambridge MS: Marketing
Science Institute, 1987. Luiz Moutinho, Bruce Curry, Fiona Davies and Paulo Rita, Computer
Modelling and Expert Systems in Marketing (London: Routledge, 1995).
49. Thomas A. Stewart, “Getting Real About Brainpower,” Fortune, November 27, 1995.
50. Rohit Deshpande, “From Market Research Use to Market Knowledge Management,” in Rohit
Deshpande (ed.), Using Market Knowledge (Thousand Oaks, CA: Sage, 2001), 1–8.
51. Peter Drucker, Peter Drucker on the Profession of Management. (Boston, MA: Harvard
Business School Press, 1998).
52. George S. Day, “Learning About Markets,” in Rohit Deshpande (ed.), Using Market Knowledge
(Thousand Oaks, CA: Sage, 2001), 9–30.
53. Thomas A. Stewart, “Is This Job Really Necessary?” Fortune, January 12, 1998, 154–155.
54. See http://sww-learn.sshel.com.
55. Thomas Stewart, Fortune, ibid.
56. Vanessa Houlder, “Xerox Makes Copies,” Financial Times, July 14, 1997, 10.
57. Eric Lesser, David Mundel and Charles Wiecha, “Managing Customer Knowledge,” Journal of
Business Strategy, November/December 2000, 35–37.
58. Edward F. McQuarrie and Shelby H. McIntyre, “Implementing the Marketing Concept Through
a Program of Customer Visits,” in Rohit Deshpande (ed.), Using Market Knowledge (Thousand
Oaks, CA: Sage, 2001), 163–190.
59. William M. Bulkeley, “Prescriptions, Toll-Free Numbers Yield a Gold Mine for Marketers,” The
Wall Street Journal, April 17, 1998, B1 and B3.
60. Stephanie Kirchgaessner, “Access Denied: The Data Industry May Face New Restrictions After
Privacy Breaches,” Financial Times, Friday, May 20, 2005.
61. Jon Ungoed-Thomas, “Hidden Surveillance Chips Can Keep Tabs on Shoppers,” Sunday Times,
February 5, 2006, 1–7.
62. John Lanchester, “Big Google Is Watching You,” Sunday Times, January 29, 2006, 5–3.
63. Dillon, Madden, and Firtle, Marketing Research in a Marketing Environment, 48. Elizabeth
MacDonald and Joanne S. Lublin, “In the Debris of a Failed Merger: Trade Secrets,” The Wall
Street Journal, March 10, 1998, B1 and B10.
64. Gemma Calvert, “It’s a No-Brainer,” The Marketer, December 2006, 19–21.
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Cases for Part 2

Case 2-1
Pfizer, Inc.
Every weekday, some 38,000 Pfizer Inc. sales reps fan others now chase are harder to defeat with a one-pill,
out around the globe. Armed with briefcases full of mass-market solution. HMOs and the like are putting the
free drug samples, reams of clinical data, and lavish brakes on skyrocketing drug spending.
expense accounts for wining and dining their quarry,
the reps infiltrate doctors’ offices and hospitals. Their End of an Era
goal: to persuade medical professionals the world over
to make Pfizer drugs the treatment of choice for their It could get much worse. As BusinessWeek went to
patients’ aches and pains. press, the Food & Drug Administration was holding
This massive sales force—roughly the size of three contentious hearings about the fate of some of the
army divisions—is just the advance guard in Pfizer’s biggest-selling and most lavishly promoted drugs—
quest for world drug domination. Equally important is painkillers that include Pfizer’s $3.3 billion Celebrex
the drugmaker’s $3 billion annual ad budget. A pricey and $1.3 billion Bextra. Evidence is mounting that all
array of prime-time commercials and glossy magazine these so-called Cox 2’s—and not just Merck & Co.’s
ads show vibrant people freed from the threats of heart withdrawn Vioxx—may be linked to cardiovascular
disease, hay fever, and a dismal sex life. Sure, consum- problems. Critics go further, though, arguing that Pfizer
ers can’t just go out and buy this stuff: It has to be pre- has not aggressively tried to answer that question—and
scribed by a doctor. But Pfizer and the industry have in at least one case has not publicized important safety
learned that stoking demand among consumers puts data on Celebrex. Even if the drugs survive, they are
irresistible pressure on doctors. That’s why Pfizer is almost surely irreparably damaged.
now the fourth-largest advertiser in the land. Add it up, and it looks an awful lot like the end of
Efforts such as these impose huge fixed costs. Pfizer, an era. Big Pharma’s sales are expected to grow by a
for example, now spends twice as much on sales and sluggish 2.2% annual average through 2010, according
administrative expenses—$16.9 billion last year—as to Datamonitor PLC. Pfizer’s top line over that period
it does on research and development. And it employs will actually decline, by an estimated 1.5% a year
15,000 scientists and support staff in seven major (see Exhibit 1). While Pfizer has posted strong earn-
labs around world. As long as those labs are churning ings growth during Chairman and Chief Executive
out a steady stream of blockbuster drugs for Pfizer’s Officer Henry A. “Hank” McKinnell Jr.’s four-year
gargantuan sales force to promote, this mass-market tenure, much of that has come from cost-cutting in the
approach is extremely profitable. Pfizer, which has wake of big acquistions. That has caused investors to
more than its share of megasellers, including such flee the stock, which has dropped 45% since he became
familiar names as Lipitor, Viagra, and Zoloft, earned CEO. “The pharmaceutical industry is in the process
$16 billion last year, not counting discontinued opera- of transformation,” says longtime Pfizer board mem-
tions and onetime items, on sales of $52 billion. ber Stanley O. Ikenberry. “We have to reexamine all
There’s only one problem: The blockbuster model the assumptions that pharmaceutical companies have
doesn’t really work anymore. Pharmaceutical compa- made for as long as I can remember.”
nies, Pfizer being the leader, have sent so many sales That’s why Pfizer has quietly circulated a memo
reps into the field that they’re tripping over one another. telling its employees to brace for a restructuring that
The company’s once-vaunted labs, along with those of analysts expect will slash billions from the company’s
most of the industry, have hit a dry patch, with introduc- cost base. That’s not to say McKinnell, 62, has accepted
tions of promising new treatments slowing alarmingly. the end of the blockbuster era. While he acknowledges
Some of Pfizer’s recent launches have been duds. (Ever that Pfizer is heading into rough times, he also argues
heard of Caduet or Inspra?) The diseases Pfizer and that the company is primed for a resurgence. And he
156
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Case 2-1 Pfizer, Inc. 157
EXHIBIT 1 The Pfizer Formula Loses Its Punch next megablockbuster, a heart disease-fighting com-
McKinnell bets ...backed by a
pound that goes by the chemical name torcetrapib?
on huge drugs... blitz of advertising... Pfizer is testing the drug in a combo pill with its cur-
TOTAL 2004 SALES: 3.5
BILLIONS OF DOLLARS rent cholesterol fighter, Lipitor. And while this product
$52.5 BILLION DOLLARS PFIZER’S AD is still three years away from the market, if tests show
SALES FROM SPENDING that it causes major reductions of plaque in arteries of
TOP 5 DRUGS 3.0
the heart, McKinnell believes it could eventually sur-
$24.7 BILLION
pass Lipitor’s $11 billion in annual sales. “If it works, it
2.5 will be the biggest blockbuster ever,” says McKinnell.
As for those who argue that the blockbuster model is
2.0 a bust, he has sharp words: “People who advocate that
don’t understand our business.”
0
’00 ’01 ’02 ’03 ’04
EST. Niche Marketing
...but now growth ...pushing down
has hit a wall... Pfizer’s stock price Still, the signs are all around him. He has seen the
3
PERCENT DOLLARS Age of Viagra pass as rivals crowded into the erectile-
45
MONTHLY dysfunction field; sales of that signature Pfizer product
2.2% CLOSE
2 40 slid 11% last year, to $1.7 billion, far below initial pro-
PFIZER’S
35 jections. Nonetheless, Pfizer and its competitors keep
EXPECTED
1 YEARLY SALES anteing up more advertising dollars (see Feature at end
GROWTH 30
2005-10 of the case). Viagra is the leader, but the companies
0
INDUSTRY’S 25 behind Cialis and Levitra are ceding nothing, mak-
EXPECTED
−1 YEARLY SALES ing erectile-dysfunction drugs one of the most heavily
GROWTH 20
2005-10 advertised categories on TV. McKinnell is left scratch-
−1.5%
−2 0 ing his head: “Normally a new entry creates new inter-
JAN. ’01 FEB. 15, ’05
Data: Pfizer Inc., SG Cowen Securities, Datamonitor PLC, Bloomberg Financial
est in the market. That doesn’t seem to be happening
Markets here. We certainly have the Viagra team trying to figure
that out.”
That’s not to say there won’t be blockbuster drugs
has become the public face of an industry that these in the future. McKinnell is right that there are some
days seems only one step above the tobacco business in huge opportunities, such as an anti-smoking drug his
public opinion. That’s him on C-SPAN for an hour, try- labs are working on. But by and large, the diseases that
ing to soothe callers irate over the high price of drugs. remain without satisfactory treatments either repre-
That’s him calmly looking into the camera in TV ads as sent smaller markets or are so complex that they defy
he explains how Pfizer’s scientists are pushing for cures one-size-fits-all solutions. Pfizer has a number of excit-
for the greatest of human scourges. He simply won’t ing cancer drugs in development, for example. While
cotton to the notion that his company’s go-go years are those may be decent-size products, cancer therapies
gone-gone. typically aren’t multibillion-dollar products sold by
Quite the opposite. McKinnell argues that there are a your neighborhood general practitioner. And as medi-
host of untreated diseases that represent huge potential cine moves toward more personalized treatments linked
markets. He says Pfizer’s internal research is presenting to an individual’s genetic makeup, marketing will need
more great opportunities than ever before—indeed, the to become even more sophisticated. What all this
company is on track to file 20 new drug applications in means is that there will be fewer $1 billion-plus sell-
the five-year period ending in 2006. And he boasts that ers that lend themselves to being marketed through the
a number of those are potential blockbusters. existing blockbuster sales machine that has sustained
Size, McKinnell believes, is especially advanta- Big Pharma over the past decade.
geous as clinical trials become more complex and This drying up of the pipeline exposes another chal-
expensive. Who else but Pfizer, McKinnell asks, could lenge that drug companies face: They enjoy patent
afford to wager $2.1 billion on what he thinks is the protection only for a limited time—10 years typically

Confirming Pages
EXHIBIT 2
Pfizer’s Pipeline With many top-selling drugs soon
facing cheaper competition, some
Source: BusinessWeek
Problem of the company’s replacements
have uncertain futures.
DRUG TREATMENT EXPECTED ’09 SALES
torcetrapib/Lipitor Cholesterol $1.5 billion

Huge potential if data show that raising good cholesterol cuts deaths.But how
many years will it take to get the data?
Exubera* Diabetes $1.4 billion
Analysts worry that safety concerns may delay its introduction.
indiplon* Insomnia $1.4 billion

Sleep drugs should be a big market—but many rivals are also jumping in.
Macugen* Macular degeneration $815 million

Launching this quarter. Pfizer has a head start but may see competition in the
next few years.
varenicline Smoking $400 million

Strong demand for drugs that help you quit, but smokers tend to prefer them
over the counter, not by prescription.
Lyrica Neuropathic pain $250 million
Sales may be limited because it has been deemed a controlled substance by
regulators.
*Pfizer shares revenues or profits from sales with partners Data: SG Cowen, Banc of America Securities
(see Exhibit 2). After that they face an onslaught of But watch what happens if those blockbusters fiz-
cheap generic competition. Pfizer will see blockbuster zle. If Celebrex gets yanked from the market, profits
drugs worth $14 billion in sales per year lose their pat- per sales rep immediately drop to $1.1 million—a 7%
ent protection in the next three years. Even with the decline in productivity. If several drugs fall dramati-
drug applications McKinnell has in mind, most ana- cally, which will inevitably happen as patents run out,
lysts agree that there’s not enough in Pfizer’s labs to and if others fail to take off quickly, that massive sales
keep the company growing in the face of those losses. force could quickly become a massive millstone. Even
And many of the drugs it’s pursuing are the results of without the unexpected loss of one of the blockbusters,
partnerships that will ultimately make them less profit- Pfizer’s net income is expected to fall nearly 9% this
able to the company. year, to $14.7 billion, as generics begin to launch and
The thing about the blockbuster model is that it big franchises such as the Cox-2 drugs take hits.
gives you great leverage. But it cuts both ways. Each Clearly, McKinnell needs to do something. The
of Pfizer’s sales reps costs close to $170,000 per year Stanford University PhD in business, who blows off
including car, computer, and benefits, estimates Credit steam shooting his Sig Sauer handgun as a guest at
Suisse First Boston analyst Catherine J. Arnold. That the FBI firing range in Quantico, Va., will soon take
figure doesn’t change a lot if the company’s sales are aim at a major restructuring. According to the late-
soaring or falling. So a big-selling drug can generate January memo obtained by BusinessWeek, McKinnell
fantastic margins as sales ramp up. Pfizer generated an has ordered a top-to-bottom review intended to make
astonishing $45 billion in gross profits last year. That the drug giant more flexible and less bureaucratic. But
works out to $1.2 million per sales rep. Celebrex, with don’t expect him to make big cuts in his sales machine.
rich 90% gross margins, according to analysts, contrib- Sources say Pfizer’s overhaul will entail having sales-
uted some $3 billion of that. people call on fewer doctors and talk about fewer

Confirming Pages
products—with the goals of cutting down on the A more likely path is for McKinnell to go shop-
repetitive pitches doctors get and making it easier to ping for drugs to shore up Pfizer’s portfolio. He cer-
determine who’s most productive. And the sales force tainly has the financial muscle—Pfizer is expected to
will shrink, though largely through attrition and selec- generate $10 billion in free cash flow in 2005 and may
tive cuts. Employees have been told that decisions on repatriate as much as $38 billion in overseas profits to
cost reductions and the like will be announced to Wall take advantage of a one-time tax break. That’s money
Street around the April analyst meeting. Friedman, McKinnell can put to work licensing drugs or buying
Billings, Ramsey & Co. analyst David Moskowitz up smaller companies.
figures McKinnell may slash as much as $3 billion in One way or another, though, Pfizer has to address its
expenses over the next several years. dearth of new blockbusters. Like others in the industry,
Pfizer has been plagued by declining productivity in its
Radical Restructuring? labs. According to SG Cowen Securities Corp. analyst
Stephen M. Scala, Pfizer spent about $70 million on
Pfizer, though, may require more radical surgery. One each product in its pipeline in 2004, up from $53 million
smart move would be to inject the sort of bottom-up just two years earlier. That is slightly higher than the
decision-making into Pfizer that has worked so well at $65 million average for the companies Scala follows.
companies such as Johnson & Johnson. Decentraliza- And a number of the most exciting products in the
tion might be a better match for a company that figures pipeline were either acquired or licensed—a sign of the
to have a more diverse portfolio of products requiring weakness in Pfizer’s early-discovery operations. Its last
more targeted sales strategies. That would be a huge blockbuster that was discovered in its own labs, Viagra,
shift for famously top-down Pfizer. McKinnell says launched in 1998.
Pfizer has begun using a similar approach for prod- That’s why investors are so skeptical that McKinnell
uct planning, linking managers from drug discovery can get Pfizer back to its teens-plus revenue growth of
through licensing focused around specific disease cat- the 1990s. Says portfolio manager Edwin C. Ciskowski
egories, such as cardiovascular or metabolic disorders. at money-management firm Broadview Advisors: “It’s
He says that sort of structure eventually could be pushed a mature company with modest growth prospects.”
across the entire company, in effect creating a series Even Pfizer’s potential hits won’t help as much as
of smaller, more focused businesses. In the memo to you would think. To understand why the company is
employees, Karen L. Katen, president of global drugs, essentially running in place, look at its huge gamble on
and Chief Financial Officer David L. Shedlarz wrote: torcetrapib. The compound, which is supposed to raise
“Many of you have expressed frustration with proc- HDL, or “good” cholesterol, is being tested at a cost of
esses that are getting increasingly cumbersome, and $800 million, with Pfizer spending $1.3 billion more to
with decision-making that seems to be slowing down. acquire a biotech company that is developing another
We share those frustrations.” HDL-raising drug. No product is more critical to Pfizer,
Even bolder would be a diversification into other since it will take a big hit when Lipitor, which contrib-
health-care businesses to reduce the reliance on utes 30% of current earnings, loses patent protection.
pharmaceuticals. Pfizer was just such a beast not that But even if the new drug is a home run and trials show
long ago—in the early ’90s it sold everything from the combo reduces heart attacks and death, ultimately
heart valves to perfume. Former Chairman and CEO it is a replacement, not a driver of new growth.
William C. Steere Jr. divested most of those busi-
nesses to focus on the high-growth drug operation. Patent Challenge
That set the stage for Pfizer’s hot run. These days,
though, medical devices are a hot growth business. The launch of the pill, expected in 2008, could become
The problem is, if Pfizer bought a device business a lot more difficult if Pfizer loses a critical patent chal-
today, it would pay a stiff price, since many device lenge. If Indian drugmaker Ranbaxy Laboratories Ltd.
makers have seen their shares bid up. Buying another succeeds in knocking down both Lipitor patents—
big drug company would be tough, too, since it which is seen as a long shot—a generic Lipitor could
would make Pfizer’s revenue base even larger, com- hit in 2006. If Ranbaxy wins on one of them, which
pounding the challenge it now faces in expanding some observers expect, generics could arrive in March,
that top line. 2010. Either way the loss would make it much tougher

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to get people to switch from a cheap generic Lipitor risky ones. They also came up with a series of tests that
to a much more expensive combination of Lipitor and might help identify duds earlier.
torcetrapib. Credit Suisse’s Arnold figures if Pfizer But that solves only part of the problem. Since
loses on both challenges, the stock, now at $25, would many of the drugs that do succeed are apt to be smaller
be worth $18. McKinnell says he’s confident Pfizer will and more targeted, they will force a big shift in the way
win on both decisions. Pfizer sells those drugs. While the company does have
Clearly, all this is hard for McKinnell to swallow. He salespeople selling to specialists today, that sales force
is, after all, the architect of the bigger-is-better strat- is dominated by reps who pitch a lot of drugs to a wide
egy. He played a key role in the acquisition of Warner- swath of practitioners. In the future, Pfizer will need
Lambert Co. in 2000 and led the Pharmacia Corp. pur- more in the way of small, highly trained SWAT teams
chase in 2003. McKinnell, widely known as a quick to target doctors focused on a particular disease. That
study, has no shortage of confidence in both Pfizer and approach will undermine a lot of the economies of
his own abilities. In a recent interview, he explained scale Pfizer has enjoyed in the past.
how working with an executive coach helped him learn
to stop jumping in with an answer before someone has Wide Sales, More Risk
finished talking. “My mind works pretty fast, and I tend
to know your question before you ask it,” McKinnell Even now, Pfizer’s mass approach to the market is tak-
says matter-of-factly. He says he now listens to the full ing some major hits. For one thing, rivals have caught
question, pauses, and then answers. on. Pfizer was one of the most aggressive drugmakers
McKinnell’s faith in the Pfizer way is well known. in building up its army of reps in the 1990s. But with
Anthony H. Wild, former president of Warner-Lambert’s an explosion in numbers across the industry, it’s get-
drug operation and now head of a small drugmaker ting harder for any one salesperson to get face time
called Medpointe Inc., recalls working with McKinnell with physicians. The number of U.S. reps grew nearly
on the integration of their companies in early 2000. 8% from 2002 to 2004, according to research firm
During a dinner in a Paris restaurant, Wild says, Verispan LLC.
McKinnell observed that as he toured and met with With so many sales reps on the prowl, doctors have
Pfizer and Warner managers, he became more con- been absolutely besieged—and they’re starting to push
vinced that Pfizer managers might be the best choice back. Dr. Edward L. Langston, a physician in Lafayette,
for key positions in the combined company. Wild says Ind., says his practice had to institute a policy last year
the Warner executives in attendance were stunned, to restrict when salespeople could visit and where in
taking the comment as an indication that they had no the office they could talk to doctors. “We’ve had multi-
future with Pfizer. “I saw a few jaws dropping,” Wild ple times where we’d see three reps from Pfizer in one
adds. McKinnell says he doesn’t recall the incident. day,” he says. Pfizer’s Katen says she hasn’t seen a drop
But in the end, most of the Warner managers left or in productivity. But Sanford C. Bernstein & Co. ana-
were let go. lyst Richard T. Evans says: “They are all committing
That blunt style is well known within Pfizer. Shortly death-by-salesperson.”
after taking over as CEO in early 2001, McKinnell made As Pfizer evolves into a company with a bigger
clear his concerns about the R&D productivity problem portfolio and a greater number of targeted or niche
in a meeting in San Juan with Pfizer’s top 300 scien- products, its massive marketing arm could weaken.
tists, including R&D chief John L. LaMattina. Known In 2003, Pfizer shelled out $2.96 billion—behind
inside Pfizer as the “Houston, we have a problem” only General Motors, Procter & Gamble, and Time
speech, McKinnell used that line to make it clear that Warner, according to Advertising Age. But many of the
the labs weren’t delivering as they should. He says he new medical advances are in areas such as oncology,
meant it as a wake-up call: “They were busy congratu- ophthalmology, or virology, where treatments vary
lating themselves on opening new buildings.” from patient to patient and don’t lend themselves to a
The group, which had already created a task force to cutesy 30-second sales pitch.
see what it could learn from previous drug-development The dangers of mixing glib advertising and medi-
flops, responded with a system to ensure that when it cine are now more obvious than ever. Consider Pfizer’s
came to compounds in development, they had a good Celebrex and Merck’s Vioxx, two next-generation pain-
balance between totally novel approaches and less killers. The much-ballyhooed benefit of the drugs

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when they were launched in the late ’90s was that they he says. “And we are exceptional in execution.” Maybe
were safer on the stomach. But according to a recent so, but this is one ailing patient whose condition defies
paper published in the Archives of Internal Medicine, a simple cure.
more than half of the growth in the market for these
Cox-2 drugs from 1999 to 2002 was sales to patients Feature: The Little Blue Pill—And
who were not at risk for stomach problems and who Pals—Have the Blues
could have taken older, cheaper drugs safely. No doubt
some of that sales growth was driven by the drugmak- Judging by the tons of TV and print ads that pitch erec-
ers’ heavy promotion and advertising. tile dysfunction drugs, you would think the big three—
Now it’s clear that broadening the market carries Viagra, Cialis, and Levitra—were selling as briskly as
with it grave risks—legal as well as medical. With beer at a football game. After all, what could be more
Vioxx pulled from the market and Celebrex also marketable than a pill that helps aging men perform
showing evidence of a link to heart attacks, plaintiffs’ better in bed?
lawyers are gunning for Merck and Pfizer. Merck’s It’s not working out that way. Despite gargantuan
legal bill could approach $20 billion. Pfizer’s liability ad budgets, sales are trailing expectations for all three
is less clear. The Justice Dept. and a group of state contenders. Viagra’s worldwide sales fell 11% last year
attorneys general have requested information on the and, at $1.7 billion, were less than half what was pro-
safety and marketing of Celebrex and Bextra. If the jected by Wall Street firms a few years ago. Cialis and
evidence suggests that Pfizer knew more about heart Levitra drove the category up 10% in the U.S. But Wall
risks than the company has admitted, it could lead to Street analysts—some of whom had speculated years
hefty penalties. In fact some critics have argued that ago that Viagra alone would be a $4.5 billion brand by
the company did not publicize an earlier study look- 2004—aren’t impressed. Cialis, marketed through a
ing at the use of Celebrex in Alzheimer’s disease that joint venture between Eli Lilly & Co. and Icos Corp.,
showed more cardiovascular problems in patients get- rang up U.S. sales of $203 million in its first full year
ting the drug than in those taking a placebo. Pfizer and spent $165 million on ads. And GlaxoSmithKline
says the data were shared with the FDA and that the PLC’s Levitra, co-marketed until recently with Bayer,
higher rates for Celebrex may have been the result of sold just $128 million worth of pills, well below what
differences in cardiac health between the Celebrex the companies spent on TV, print, and other media.
group and the placebo group. Even McKinnell is crit- Combined, the three spent 37% of their sales on ads,
ical of pharmaceutical ads. “Somehow we created an according to TNS Media Intelligence. Compare that
image that these products are totally safe,” he says. with Ford Motor Co., which spent about 7% of U.S.
“We need to communicate in the advertising that no automotive revenue on media last year.
drug is absolutely safe.” Viagra’s drop has been much steeper than anyone
Overly aggressive marketing also has made drug predicted. When it came on the scene back in 1998,
companies easier targets politically. And that pressure Viagra was a textbook case in how to market a pre-
will only grow—particularly after the government scription drug as a consumer product. In less than two
starts paying for prescription drugs for seniors in years, Pfizer Inc. cemented the name into the popular
2006. McKinnell speaks passionately about trying to lexicon in a way that marketers only dream about. “I’ve
educate politicians on the cost-effectiveness of drugs. hardly ever seen a brand franchise in any category take
But it’s a hard sell. The company invested nearly $20 off so fast,” says Los Angeles marketing consultant
million in a program in Florida that was intended to Dennis Keene.
show that better utilization of drugs would actually The reality today is much different. Less than 15%
save the state money. It did—but not enough to deter of the estimated 30 million men suffering from erectile
lawmakers, who are demanding big Medicaid price dysfunction (ED) have tried one of the drugs. Matthew
cuts. G. Beebe, brand team leader for Cialis at Lilly, says that
Big Pharma’s blockbuster business model may be many are still embarrassed to ask their doctor about the
wobbly, but McKinnell remains defiant, insisting that drugs. Another problem is that too many patients are
he will find some way to snap Pfizer out of its malaise. disappointed when they take the pill and nothing hap-
“We are willing to run experiments. Things that don’t pens. Dr. Timothy Schuster, assistant professor of urol-
work, we stop, and things that do work, we press on,” ogy at the University of Michigan Medical Center, says

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many patients don’t use the right dosage. He adds: “A canoodling, to emphasize the drug’s 36-hour working
lot of doctors don’t make the connection between ED time (compared with Viagra’s and Levitra’s four-hour
and underlying disease like cardiovascular disease and windows of opportunity). Levitra has the steepest hill
don’t engage patients.” to climb because it works about the same as Viagra
But drugmakers can also blame themselves for lag- but has less brand recognition. Bayer passed U.S.
ging sales. In their rush to grab more of the market, marketing control last year to GlaxoSmithKline and
they flooded doctors with free samples. Last year, up to Schering-Plough Corp. In January, Glaxo and new
40% of the pills taken by men were free, says pharma- partner Schering-Plough tapped Saatchi & Saatchi to
ceutical research firm ImpactRx. And clearly, the ad- scope out a different direction.
fueled hype stoked some early demand from those who So far, the passion pills haven’t had to worry much
were more curious than afflicted. about decency standards on TV networks. NBC says it
Much of that hype has now faded—but don’t expect won’t run the ads on “family” shows, but the drug com-
pillmakers to back off. Viagra’s latest ads have men panies aren’t interested in those programs anyway. “We
playfully sprouting blue horns the same color as a aim where the men are,” says Lilly’s Beebe. But hitting
Viagra pill. The Food & Drug Administration slapped them with Cupid’s arrow is proving to be anything but
Pfizer’s wrist last fall, making it withdraw some ads a sure thing.
that the agency said overpromised and failed to give –By David Kiley in New York
adequate warning about side effects. Cialis has taken Source: Amy Barrett, “Pfizer’s Funk,” BusinessWeek, February
a more romantic approach, with middle-aged couples 28, 2005, 72–82.
Case 2-2 coolness. It is a trusted safe zone that people can enter
and immediately be part of a like-minded cost/design/
Ikea environmentally-sensitive global tribe. There are other
would-be curators around—Starbucks and Virgin do a
When Roger Penguino heard Ikea was offering $4,000 good job—but Ikea does it best.
in gift certificates to the first person in line at the open- If the Swedish retailer has its way, you too will live
ing of its new Atlanta store, he had no choice. He threw in a BoKlok home and sleep in a Leksvik bed under a
a tent in the back of his car and sped down to the site. Brunskära quilt. (Beds are named for Norwegian cities;
There, the 24-year-old Mac specialist with Apple Com- bedding after flowers and plants. One disaster: a child’s
puter Inc. pitched camp, hunkered down, and waited. bed called Gutvik, which sounds like “good f***” in
And waited. Seven broiling days later, by the time the German.) Ikea wants to supply the food in your fridge
store opened on June 29, more than 2,000 Ikea fanat- (it also sells the fridge) and the soap in your shower.
ics had joined him. Some were lured by the promise The Ikea concept has plenty of room to run: The
of lesser prizes for the first 100. Others were just there retailer accounts for just 5% to 10% of the furniture mar-
for the carnival atmosphere (somebody even brought a ket in each country in which it operates. More important,
grill). The newly wed Penguino got his certificates and says CEO Anders Dahlvig, is that “awareness of our brand
bagged a $799 Karlanda sofa and a $179 Malm bed, is much bigger than the size of our company.” That’s
among other items. He also achieved celebrity status: because Ikea is far more than a furniture merchant. It
“Whenever I go back, employees recognize me and sells a lifestyle that customers around the world embrace
show me the new stuff.” as a signal that they’ve arrived, that they have good
Penguino is a citizen of Ikea World, a state of mind taste and recognize value. “If it wasn’t for Ikea,” writes
that revolves around contemporary design, low prices, British design magazine Icon, “most people would have
wacky promotions, and an enthusiasm that few institu- no access to affordable contemporary design.” The mag-
tions in or out of business can muster. Perhaps more azine even voted Ikea founder Ingvar Kamprad the most
than any other company in the world, Ikea has become influential tastemaker in the world today.
a curator of people’s lifestyles, if not their lives. At a As long as consumers from Moscow to Beijing and
time when consumers face so many choices for every- beyond keep striving to enter the middle class, there will
thing they buy, Ikea provides a one-stop sanctuary for be a need for Ikea. Think about it: What mass-market

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Case 2-2 Ikea 163
retailer has had more success globally? Not Wal-Mart privately held Ikea guards profit figures as jealously
Stores Inc., which despite vast strengths has stumbled as its recipe for Swedish meatballs, analyst Mattias
in Brazil, Germany, and Japan. Not France’s Carrefour, Karlkjell of Stockholm’s ABG Sundal Collier conserva-
which has never made it in the U.S. Ikea has had its tively estimates Ikea’s pretax operating profits at $1.7
slip-ups, too. But right now its 226 stores in Europe, billion. Ikea maintains these profits even while it cuts
Asia, Australia, and the U.S. are thriving, hosting 410 prices steadily. “Ikea’s operating margins of approxi-
million shoppers a year. The emotional response is mately 10% are among the best in home furnishing,”
unparalleled. The promise of store vouchers for the Karlkjell says. They also compare well with margins of
first 50 shoppers drew thousands to an Ikea store in 5% at Pier 1 Imports and 7.7% at Target, both competi-
the Saudi Arabian city of Jeddah in September, 2004. tors of Ikea in the U.S.
In the ensuing melee, two people died and 16 were To keep growing at that pace, Ikea is accelerating
injured. A February opening in London attracted up to store rollouts. Nineteen new outlets are set to open
6,000 before police were called in. worldwide in the fiscal year ending Aug. 31, 2006, at a
Why the uproar? Ikea is the quintessential global cost of $66 million per store, on average. CEO Dahlvig
cult brand. Just take those stunts. Before the Atlanta is keen to boost Ikea’s profile in three of its fastest-
opening, Ikea managers invited locals to apply for the growing markets: the U.S., Russia (Ikea is already
post of Ambassador of Kul (Swedish for fun). The five a huge hit in Moscow), and China (now worth $120
winners wrote an essay on why they deserved $2,000 million in sales). In the U.S. he figures the field is
in vouchers. There was one catch: They would have to wide open: “We have 25 stores in a market the size of
live in the store for three days before the opening, take Europe, where we have more than 160 stores.” The goal
part in contests, and sleep in the bedding department. is 50 U.S. outlets by 2010: Five are opening this year,
“I got about eight hours of sleep total because of all up from just one in 2000.
the drilling and banging going on,” says winner Jordan The key to these rollouts is to preserve the strong
Leopold, a manager at Costco Wholesale. enthusiasm Ikea evokes, an enthusiasm that has inspired
Leopold got his bedroom set. And Ikea got to craft two case studies from Harvard Business School and
another story about itself—a story picked up in the endless shopper comment on the Net. Examples: “Ikea
press that drew even more shoppers. More shoppers, makes me free to become what I want to be” (from
more traffic. More traffic, more sales. More sales, more Romania). Or this: “Half my house is from Ikea—and
buzz. A new store in Bolingbrook, Ill., near Chicago the nearest store is six hours away” (the U.S.). Or this:
is expected to generate some $2.5 million in tax rev- “Every time, it’s trendy for less money” (Germany).
enues, so the town is paying down debt and doing away What enthralls shoppers and scholars alike is the
with some local levies. store visit—a similar experience the world over. The
Such buzz has kept Ikea’s sales growing at a healthy blue-and-yellow buildings average 300,000 square feet
clip: For the fiscal year ended Aug. 31, revenues rose in size, about equal to five football fields. The sheer
15%, to $17.7 billion (see Exhibit 1). And although number of items—7,000, from kitchen cabinets to
EXHIBIT 1
IKEA BY THE NUMBERS
With 226 stores in 33 countries, Ikea is now Sweden’s best-known export
BILLIONS OF DOLLARS 2005 SALES, BY REGION 2005 TOP FIVE SUPPLIER COUNTRIES
18
ANNUAL SALES 3% 16% CHINA 18%*
16 ASIA AND NORTH
AUSTRALIA AMERICA POLAND 12%
14
SWEDEN 9%
12 81%
EUROPE
10 ITALY 7%
0 GERMANY 6%
’00 ’01 ’02 ’03 ’04 ’05
Data: Ikea *SHARE OF PRODUCT PURCHASES BY IKEA

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candlesticks—is a decisive advantage. “Others offer Then, clutching your dog-eared catalog (the print
affordable furniture,” says Bryan Roberts, research run for the 2006 edition was 160 million—more than
manager at Planet Retail, a consultancy in London. the Bible, Ikea claims), you proceed along a marked
“But there’s no one else who offers the whole concept path through the warren of showrooms. “Because the
in the big shed.” store is designed as a circle, I can see everything as
The global middle class that Ikea targets shares buy- long as I keep walking in one direction,” says Krystyna
ing habits. The $120 Billy bookcase, $13 Lack side Gavora, an architect who frequents Ikea in Schaumburg,
table, and $190 Ivar storage system are best-sellers Ill. Wide aisles let you inspect merchandise without
worldwide. (U.S. prices are used throughout this case.) holding up traffic. The furniture itself is arranged in
Spending per customer is even similar. According to fully accessorized displays, down to the picture frames
Ikea, the figure in Russia is $85 per store visit—exactly on the nightstand, to inspire customers and get them to
the same as in affluent Sweden. spend more. The settings are so lifelike that one writer
Wherever they are, customers tend to think of the is staging a play at Ikea in Renton, Wash (Exhibit 2).
store visit as more of an outing than a chore. That’s Along the way, one touch after another seduces the
intentional: As one of the Harvard B-school studies shopper, from the paper measuring tapes and pencils
states, Ikea practices a form of “gentle coercion” to to strategically placed bins with items like pink plas-
keep you as long as possible. Right at the entrance, for tic watering cans, scented candles, and picture frames.
example, you can drop off your kids at the playroom, These are things you never knew you needed but at less
an amenity that encourages more leisurely shopping. than $2 each you load up on them anyway. You set out
EXHIBIT 2 What a Sweetheart of a Love Seat

Lars Engman learned the hard way that furniture plus three in the U.S. and two in China, each of which
needs to do more that just look good. After his 6-year- is guaranteed a minimum volume.
old daughter and her rambunctious pals destroyed his After much experimenting with different materi-
expensive Italian-made sofa in three months in the als, the frames are now made from a combination of
1970s, the Ikea product developer was inspired to particleboard, fiberboard, and polyurethane foam, a
create an equally stylish but kidproof alternative. “I mix that is cheaper and lighter in weight than solid
wanted it to be hard-wearing and kid-friendly without wood. It wasn’t until last year, though, that Ikea finally
compromising on design,” says Engman, now Ikea’s figured out how to break down the Klippan so it could
design manager, based in Almhult, Sweden. It would be flat-packed. Now the frame comes in four separate
have to be soft around the edges yet sturdy enough to pieces: The armrests and back slip into slots in the
withstand years of wear and tear, and have machine- seating base. The new system saves 50% on shipping
washable slipcovers to make it easy to keep clean. costs and also frees up room at Ikea’s warehouses.
More important, it would have to meet the Ikea chal- The cotton slipcovers for the Klippan have also
lenge of good looks at a low price. A tall order. But gotten cheaper. By centralizing everything from the
after endless testing of materials and fabrics, Klippan production of the fabric to the stitching of the covers
was born in 1980. More than two decades later, the to just four core suppliers in China and Europe, Ikea
$249 love seat with its clean lines, bright colors, sim- has been able to lower the retail price of the covers by
ple legs, and compact size remains one of Ikea’s best- 20% since 2004.
sellers with 1.5 million sold since 1998. Even after a product is designed and in the stores,
The saga of the Klippan is that of Ikea in miniature: Ikea never stops seeking ways to lower costs. For
strong design, logistical efficiency, and constant cost- instance, it discovered that by using a different type of
cutting. Although the sofa was initially manufactured production process, it could cut down the number of
in Sweden, soon after Ikea outsourced production to materials used to make the Klippan sofa cushions to just
lowercost suppliers in Poland. As the Klippan’s popu- two. All of these efficiencies have allowed Ikea to slash
larity grew, the company decided it made more sense the Klippan’s price some 40% since 1999. Currently it
to work with suppliers in each of Ikea’s big markets sells for around $249 in the U.S., but the price next year
to avoid having to ship the product all over the world. will fall to $202—affordable even for a cash-strapped
Today, there are five suppliers for the frames in Europe, college student, or a harried family with little kids.

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Case 2-2 Ikea 165
to buy a $40 coffee table but end up dropping $500 on and seeds from a shed on his family’s farm in southern
everything from storage units to glassware. “They have Sweden. In 1951, the first catalog appeared (Kamprad
this way of making you believe nothing is expensive,” penned all the text himself until 1963). His credo of cre-
says Bertille Faroult, a shopper at Ikea on the outskirts ating “a better life for many” is enshrined in his almost
of Paris. The bins and shelves constantly hold surprises: evangelical 1976 tract, A Furniture Dealer’s Testament.
Ikea replaces a third of its product line every year. Peppered with folksy tidbits—“divide your life into
Then there’s the stop at the restaurant, usually placed 10-minute units and sacrifice as few as possible in mean-
at the center of the store, to provide shoppers a breather ingless activity,” “wasting resources is a mortal sin”
and encourage them to keep going. You proceed to the (that’s for sure: employees are the catalog models), or
warehouse, where the full genius of founder Kamprad is the more revealing “it is our duty to expand”—the pam-
on display. Nearly all the big items are flat-packed, which phlet is given to all employees the day they start.
not only saves Ikea millions in shipping costs from sup- Kamprad, though officially retired, is still the cheer-
pliers but also enables shoppers to haul their own stuff leader for the practices that define Ikea culture. One is
home—another savings. Finally you have the fun (or egalitarianism. Ikea regularly stages Antibureaucracy
agony) of assembling at home, equipped with nothing Weeks, during which executives work on the shop floor
but an Allen wrench and those cryptic instructions. or tend the registers. “In February,” says CEO Dahlvig,
A vocal minority rails at Ikea for its long lines, “I was unloading trucks and selling beds and mat-
crowded parking lots, exasperating assembly experi- tresses.” (Exhibit 3).
ences, and furniture that’s hardly built for the ages (the Another is a steely competitiveness. You get a sense
running joke is that Ikea is Swedish for particle board). of that at one of Ikea’s main offices, in Helsingborg,
But the converts outnumber the critics. And for every Sweden. At the door-way, a massive bulletin board
fan who shops at Ikea, there seems to be one working tracks weekly sales growth, names the best-perform-
at the store itself. The fanaticism stems from founder ing country markets, and identifies the best-selling
Kamprad, 79, a figure as important to global retailing as furniture. The other message that comes across loud
Wal-Mart’s Sam Walton. Kamprad started the company and clear: Cut prices. At the far end of the Helsingborg
in 1943 at the age of 17, selling pens, Christmas cards, foyer is a row of best-selling Klippan sofas, displaying
EXHIBIT 3
How to Build a Cult Brand
Ikea sells a lifestyle that signifies hip design,
thrift, and simplicity. For the aspiring global
middle class, buying Ikea is a sign of success.
Here's how the Swades do it.
CREATE THE STORY SEDUCE THE SHOPPER
The retailer is a master at building Customer focus is so intense
buzz, which creates evangelists for that even senior management
its brand, who then spread the must work behind cash registers
story by phone, word of mouth, and in the warehouse for brief
and even blogs from Shanghai to stints every year. The stores
Chicago. The Ambassador of Kul are laid out to promote fun:
promotion, for example, gives Restaurants and play centers
essay contest winners the chance encourage shoppers to spend
to camp out in a store before it the day. Simple touches, from
opens. That excites shoppers and free pencils to paper measuring-
generates huge publicity. tapes, make it easy to shop.
INSPIRE THE STAFF SURPRISE ON VALUE

Employees won't get rich, but they Ikea mandates price cuts every
do get to enjoy autonomy, very little year, but designers also deliver
hierarchy, and a family-friendly on looks and quality. Every year
culture. In return they buy into the designers must meet stretch
philosophy of frugality and style that goals, like designing a bedroom
drives the whole company. set for $130.

Confirming Pages
models from 1999 to 2006 with their euro price unusual materials. The results: a table fashioned from
tags. In 1999 the Klippan was $354. In 2006 it will reddish-brown birch heartwood (furniture makers pre-
be $202. fer the pale exterior wood) and a storage system made
The montage vividly illustrates Ikea’s relentless from recycled milk cartons.
cost-cutting. The retailer aims to lower prices across its If sales keep growing at their historical average, by
entire offering by an average of 2% to 3% each year. It 2010 Ikea will need to source twice as much material
goes deeper when it wants to hit rivals in certain seg- as today. “We can’t increase by more than 20 stores a
ments. “We look at the competition, take their price, year because supply is the bottleneck,” says Lennart
and then slash it in half,” says Mark McCaslin, man- Dahlgren, country manager for Russia. Since Russia is
ager of Ikea Long Island, in Hicksville, N.Y. a source of timber, Ikea aims to turn it into a major sup-
It helps that frugality is as deeply ingrained in the plier of finished products.
corporate DNA as the obsession with design. Manag- Adding to the challenge, the suppliers and design-
ers fly economy, even top brass. Steen Kanter, who left ers have to customize some Ikea products to make them
Ikea in 1994 and now heads his own retail consultancy sell better in local markets. In China, the 250,000 plastic
in Philadelphia, Kanter International, recalls that while placemats Ikea produced to commemorate the year of
flying with Kamprad once, the boss handed him a cou- the rooster sold out in just three weeks. Julie Desrosiers,
pon for a car rental he had ripped out from an in-flight the bedroom-line manager at Ikea of Sweden, visited
magazine. people’s houses in the U.S. and Europe to peek into their
This cost obsession fuses with the design culture. closets, learning that “Americans prefer to store most
“Designing beautiful-but-expensive products is easy,” of their clothes folded, and Italians like to hang.” The
says Josephine Rydberg-Dumont, president of Ikea of result was a wardrobe that features deeper drawers for
Sweden. “Designing beautiful products that are inex- U.S. customers.
pensive and functional is a huge challenge.” The American market poses special challenges for
No design—no matter how inspired—finds its way Ikea because of the huge differences inside the U.S.
into the showroom if it cannot be made affordable. To “It’s so easy to forget the reality of how people live,”
achieve that goal, the company’s 12 full-time designers says Ikea’s U.S. interior design director, Mats Nilsson.
at Almhult, Sweden, along with 80 freelancers, work In the spring of 2004, Ikea realized it might not be
hand in hand with in-house production teams to iden- reaching California’s Hispanics. So its designers vis-
tify the appropriate materials and least costly suppliers, ited the homes of Hispanic staff. They soon realized
a trial-and-error process that can take as long as three they had set up the store’s displays all wrong. Large
years. Example: For the PS Ellan, a $39.99 dining chair Hispanic families need dining tables and sofas that fit
that can rock back on its hind legs without tipping over, more than two people, the Swedish norm. They prefer
designer Chris Martin worked with production staff bold colors to the more subdued Scandinavian pal-
for a year and a half to adapt a wood-fiber composite, ette and display tons of pictures in elaborate frames.
an inexpensive blend of wood chips and plastic resin Nilsson warmed up the showrooms’ colors, adding more
used in highway noise barriers, for use in furnishings. seating and throwing in numerous picture frames.
Martin also had to design the chair to break down Ikea is particularly concerned about the U.S. since
into six pieces, so it could be flat-packed and snapped it’s key to expansion—and since Ikea came close to
together without screws (Exhibit 4). blowing it. “We got our clocks cleaned in the early
With a network of 1,300 suppliers in 53 countries, 1990s because we really didn’t listen to the consumer,”
Ikea works overtime to find the right manufacturer for says Kanter. Stores weren’t big enough to offer the
the right product. It once contracted with ski makers— full Ikea experience, and many were in poor locations.
experts in bent wood—to manufacture its Poang arm- Prices were too high. Beds were measured in centim-
chairs, and it has tapped makers of supermarket carts eters, not king, queen, and twin. Sofas weren’t deep
to turn out durable sofas. Simplicity, a tenet of Swedish enough, curtains were too short, and kitchens didn’t fit
design, helps keep costs down. The 50¢ Trofé mug U.S.-size appliances. “American customers were buy-
comes only in blue and white, the least expensive pig- ing vases to drink from because the glasses were too
ments. Ikea’s conservation drive extends naturally from small,” recalls Goran Carstedt, the former head of Ikea
this cost-cutting. For its new PS line, it challenged 28 North America, who helped engineer a turnaround.
designers to find innovative uses for discarded and Parts of the product line were adapted (no more metric

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Case 2-2 Ikea 167
EXHIBIT 4 Need a Home to Go with That Sofa?

Like many young couples, artist Nina Leth Jensen, Swedish developer Skanska, also is eyeing France,
32, and her husband, Jakob, 33, a manager with the Poland, the Netherlands, and the U.S. “There is a global
Copenhagen metro, feared they would never be able need for affordable housing,” says BoKlok managing
to afford their own home. With a four-year-old child director Anders Larsson. “We want to fill that gap.”
and another on the way, the family was desperate to To come up with the right price tag, Ikea enlisted
move to a bigger space but found themselves priced well-known Swedish economist Pia Nilsson. In-store
out of the market. customer surveys then revealed what the market
Then in June, 2004, Nina spotted an ad for BoKlok wanted: a safe, low-rise apartment in a small-scale
(Swedish for “smart living”), a line of affordable pre- development with outside space, open-plan living,
fab homes marketed by Ikea. “I told my husband, ‘this and lots of light.
is the house for us,’ ” says Nina. “We already had a lot A BoKlok development consists of several timber-
of Ikea furniture, so why not have a total Ikea home?” framed buildings, each containing five to six apart-
Today, the Jensens live in a BoKlok development ments. Putting the units together is a snap. Most of
in Hillerod, Denmark, just outside of Copenhagen. For the work takes place on the factory floor. The assem-
$45,000, some 25% less than comparable homes in bly line starts with carpenters, who erect the walls
the area, the family got an airy 800-square-foot, three- and windows. Then a fully equipped Ikea kitchen and
bedroom apartment with an open-plan living area, bathroom are added. Floors, shelving units, and elec-
small garden, and garage. Ikea also threw in $500 in gift trical wiring are installed before painters add the final
certificates and the free services of an Ikea designer. touches. The modular units are then delivered to the
Aimed largely at first-time buyers, BoKlok is construction site on 18-wheel trucks. A crane drops
proving a big hit, with more than 2,500 units sold in them in place, and builders complete the last fittings,
Sweden, Finland, Norway, and Denmark since the a process that typically takes just one day.
program was launched in 1997. In a new develop- CEO Anders Dahlvig acknowledges BoKlok “gener-
ment outside Oslo, the 60 homes sold out in 45 min- ates a lot of buzz for the brand,” but adds, “we are not
utes. Next up: Southampton, England, where the first a house builder ourselves, so we have to be cautious.”
BoKloks will go on sale in January. BoKlok, a stand- Yet with more and more people clamoring for the total
alone company that is jointly controlled by Ikea and Ikea lifestyle, Ikea may have to change its tune.
measurements), new and bigger store locations chosen, Perhaps the bigger issue is what happens inside
prices slashed, and service improved. Now U.S. man- Ikea. “The great challenge of any organization as it
agers are paying close attention to the tiniest details. becomes larger and more diverse is how to keep the
“Americans want more comfortable sofas, higher- core founding values alive,” says Harvard Business
quality textiles, bigger glasses, more spacious enter- School Professor Christopher A. Bartlett, author of a
tainment units,” says Pernille Spiers-Lopez, head of 1996 case study. Ikea is still run by managers who
Ikea North America. were trained and groomed by Kamprad himself—and
Can the cult keep thriving? Ikea has stumbled badly who are personally devoted to the founder. As the
before. A foray into Japan 30 years ago was a disas- direct links with Kamprad disappear, the culture may
ter (the Japanese wanted high quality and great mate- start to fade.
rials, not low price and particle board). The company For now, the founder’s legacy is alive and well. The
is just now gearing up for a return to Japan next year. Klippan couches are selling briskly. New lines of foods,
Ikea is also seeing more competition than ever. In the travel gear, and toiletries are due soon. Ikea is gearing
U.S., Target Corp. has recruited top designer Thomas up for its Christmas tree promotion—you buy a live
O’Brien to develop a range of low-priced furnishings, tree, then return it for a rebate (and end up shopping at
which were launched in October. Kmart has been col- Ikea in the slow month of January).
laborating with Martha Stewart on its own furniture And the fans keep clamoring for more. At least
line. An Ikea-like chain called Fly is popular in France. once a year, Jen Segrest, a 36-year-old freelance Web
In Japan Nitori Co. has a lock on low-cost furniture. designer, and her husband travel 10 hours round-trip

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from their home in Middletown, Ohio, to Ikea in even started a blog called OH! IKEA. The banner on
Schaumburg, Ill., near Chicago. “Every piece of furni- the home page reads “Ikea in Ohio—Because man can-
ture in my living room is Ikea—except for an end table, not live on Target alone.”
which I hate. And next time I go to Ikea I’ll replace it,” Source: Kerry Capell, “IKEA,” BusinessWeek, November 14,
says Segrest. To lure the retailer to Ohio, Segrest has 2005, 97–106.
Case 2-3 Invaluable Role

China and India: Opportunities Now hop a plane to India. It is hard to tell this is the
and Challenges world’s other emerging superpower. Jolting sights of
extreme poverty abound even in the business capitals.
It may not top the must-see list of many tourists. But A lack of subways and a dearth of expressways result
to appreciate Shanghai’s ambitious view of its future, in nightmarish traffic.
there is no better place than the Urban Planning Exhi- But visit the office towers and research and devel-
bition Hall, a glass-and-metal structure across from opment centers sprouting everywhere, and you see the
People’s Square. The highlight is a scale model bigger miracle. Here, Indians are playing invaluable roles in the
than a basketball court of the entire metropolis—every global innovation chain. Motorola, Hewlett-Packard,
skyscraper, house, lane, factory, dock, and patch of Cisco Systems, and other tech giants now rely on their
green space—in the year 2020. Indian teams to devise software platforms and daz-
There are white plastic showpiece towers designed zling multimedia features for next-generation devices.
by architects such as I.M. Pei and Sir Norman Foster. Google principal scientist Krishna Bharat is setting
There are immense new industrial parks for autos and up a Bangalore lab complete with colorful furniture,
petrochemicals, along with new subway lines, airport exercise balls, and a Yamaha organ—like Google’s
runways, ribbons of expressway, and an elaborate river- Mountain View (Calif.) headquarters—to work on core
front development, site of the 2010 World Expo. Nine search-engine technology. Indian engineering houses
futuristic planned communities for 800,000 residents use 3-D computer simulations to tweak designs of eve-
each, with generous parks, retail districts, man-made rything from car engines and forklifts to aircraft wings
lakes, and nearby college campuses, rise in the sub- for such clients as General Motors Corp. and Boeing
urbs. The message is clear. Shanghai already is looking Co. Financial and market-research experts at outfits
well past its industrial age to its expected emergence as like B2K, OfficeTiger, and Iris crunch the latest disclo-
a global mecca of knowledge workers. “In an informa- sures of blue-chip companies for Wall Street. By 2010
tion economy, it is very important to have urban space such outsourcing work is expected to quadruple, to $56
with a better natural and social environment,” explains billion a year.
Architectural Society of Shanghai President Zheng Even more exhilarating is the pace of innovation,
Shiling, a key city adviser. as tech hubs like Bangalore spawn companies produc-
It is easy to dismiss such dreams as bubble-economy ing their own chip designs, software, and pharmaceu-
hubris—until you take into account the audacious ticals. “I find Bangalore to be one of the most exciting
goals Shanghai already has achieved. Since 1990, places in the world,” says Dan Scheinman, Cisco Sys-
when the city still seemed caught in a socialist time tems Inc.’s senior vice-president for corporate develop-
warp, Shanghai has erected enough high-rises to ment. “It is Silicon Valley in 1999.” Beyond Bangalore,
fill Manhattan. The once-rundown Pudong district Indian companies are showing a flair for producing
boasts a space-age skyline, some of the world’s big- high-quality goods and services at ridiculously low
gest industrial zones, dozens of research centers, and prices (page 64), from $50 air flights and crystal-clear
a bullet train. This is the story of China, where an 2¢-a-minute cell-phone service to $2,200 cars and car-
extraordinary ability to mobilize workers and capital diac operations by top surgeons at a fraction of U.S.
has tripled per capita income in a generation, and has costs. Some analysts see the beginnings of hypercom-
eased 300 million out of poverty. Leaders now are fre- petitive multinationals. “Once they learn to sell at Indian
netically laying the groundwork for decades of new prices with world quality, they can compete anywhere,”
growth. predicts University of Michigan management guru C.K.

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Case 2-3 China and India: Opportunities and Challenges 169
Prahalad. Adds A. T. Kearney high-tech consultant John to their emergence is the saga of 19th-century America,
Ciacchella: “I don’t think U.S. companies realize India a huge continental economy with a young, driven work-
is building next-generation service companies.” force that grabbed the lead in agriculture, apparel, and
the high technologies of the era, such as steam engines,
Simultaneous Takeoffs the telegraph, and electric lights.
But in a way, even America’s rise falls short in com-
China and India. Rarely has the economic ascent of parison to what’s happening now. Never has the world
two still relatively poor nations been watched with seen the simultaneous, sustained takeoffs of two nations
such a mixture of awe, opportunism, and trepidation. that together account for one-third of the planet’s popula-
The postwar era witnessed economic miracles in Japan tion. For the past two decades, China has been growing at
and South Korea. But neither was populous enough to an astounding 9.5% a year, and India by 6%. Given their
power worldwide growth or change the game in a com- young populations, high savings, and the sheer amount
plete spectrum of industries. China and India, by con- of catching up they still have to do, most economists fig-
trast, possess the weight and dynamism to transform ure China and India possess the fundamentals to keep
the 21st-century global economy. The closest parallel growing in the 7%-to-8% range for decades (Exhibit 1).
EXHIBIT 1
China and India

China will remain the ...while India soars
have radically manufacturing giant... in tech and services
different economic TRILLIONS OF U.S. DOLLARS BILLIONS OF U.S. DOLLARS
1.8 90
models. But given MERCHANDISE
EXPORTS
IT AND SERVICE
EXPORTS
their relative 1.5
INDIA CHINA
75
INDIA CHINA
advantages and 1.2 60
flaws, both are 0.9 45
expected to deliver
0.6 30
very high growth
for decades 0.3 15
*BASED ON FINANCIAL DISCLO-
SURES OF 132 TOP PUBLICITY 0 0
LISTED CHINESE COMPANIES AND ’02 ’04 ’06 ’08 ’10 ’02 ’04 ’06 ’08 ’10
EST. EST.
214 TOP INDIAN COMPANIES Data: Global Insight Inc. Data: Evaluserve
**DATA FOR 2004 FISCAL YEAR
INCOMPLETE
India’s companies ...and its banks ...but China lures

are more profitable... are in better shape... more investment
PERCENT PERCENT OF TOTAL BANK LOANS BILLIONS OF U.S. DOLLARS
18 36 66
AVERAGE RETURN ON NONPERFORMING FOREIGN DIRECT
INVESTED CAPITAL* LOANS INVESTMENT
15 30 55
INDIA CHINA INDIA CHINA INDIA CHINA
12 24 44
9 18 33
6 12 22
3 6 11
0.6 0.8
0 0 0
’00 ’01 ’02 ’03 ’04** ’99 ’00 ’01 ’02 ’03 ’80 ’90 ’00 ’04
Data: Standard & Poor’s Compuslat Data: International Monetary Fund Data: World Bank, Reserve Bank of India

Confirming Pages
Barring cataclysm, within three decades India in mass manufacturing, and is one of the few nations
should have vaulted over Germany as the world’s third- building multibillion-dollar electronics and heavy
biggest economy. By mid-century, China should have industrial plants. India is a rising power in software,
overtaken the U.S. as No.1. By then, China and India design, services, and precision industry. This raises a
could account for half of global output. Indeed, the provocative question: What if the two nations merge
troika of China, India, and the U.S.—the only indus- into one giant “Chindia?” Rival political and economic
trialized nation with significant population growth— ambitions make that unlikely. But if their industries
by most projections will dwarf every other economy truly collaborate, “they would take over the world tech
(Exhibit 2). industry,” predicts Forrester Research Inc. analyst Navi
What makes the two giants especially powerful is Radjou.
that they complement each other’s strengths. An accel- In a practical sense, the yin and yang of these
erating trend is that technical and managerial skills in immense workforces already are converging. True,
both China and India are becoming more important annual trade between the two economies is just $14 bil-
than cheap assembly labor. China will stay dominant lion. But thanks to the Internet and plunging telecom
EXHIBIT 2
China has surged ...but India’s younger

ahead of India... work force...
U.S. DOLLARS AVERAGE AGE OF WORKSPACE
1200 60
PER CAPITA GDP
INDIA CHINA INDIA CHINA U.S.
1000 50
800 40
600 30
400 20
200 10
0 0
’70 ’80 ’90 ’00 ’04 2005 2015 2025 2050
EST.
Data: World Bank, Global Insight Inc. Data: U.N. Population Division
...and swelling ...will help it

population... catch up
BILLIONS OF PEOPLE TRILLIONS OF U.S. DOLLARS
1.8 INDIA CHINA U.S.
60 REAL GDP
INDIA CHINA U.S.
1.5 50
1.2 40
0.9 30
0.6 20
0.3 10
0 0
2005 2015 2025 2050 2005 2015 2025 2050*
EST. EST.
*ASSUMES CHINA ANNUAL GROWTH RATE PEAKS AT 8.8% IN 2010, TRENDING
DOWN TO 3.7% BY 2046, INDIA GROWTH PEAKS AT 7.3% IN 2025 TRENDING TO
5.9% BY 2046.
Data: U.N. Population Division projections Data: Keystone-India

Confirming Pages
costs, multinationals are having their goods built in East and Africa, and China’s military will likely chal-
China with software and circuitry designed in India. lenge U.S. dominance in the Pacific.
As interactive design technology makes it easier to One implication is that the balance of power in
perfect virtual 3-D prototypes of everything from tel- many technologies will likely move from West to
ecom routers to turbine generators on PCs, the distance East (Exhibit 4). An obvious reason is that China and
between India’s low-cost laboratories and China’s low- India graduate a combined half a million engineers
cost factories shrinks by the month. Managers in the and scientists a year, vs. 60,000 in the U.S. In life sci-
vanguard of globalization’s new wave say the impact ences, projects the McKinsey Global Institute, the
will be nothing less than explosive. “In a few years total number of young researchers in both nations will
you’ll see most companies unleashing this massive rise by 35%, to 1.6 million by 2008. The U.S. supply
productivity surge,” predicts Infosys Technologies CEO will drop by 11%, to 760,000. As most Western scien-
Nandan M. Nilekani. tists will tell you, China and India already are mak-
To globalization’s skeptics, however, what’s good for ing important contributions in medicine and materials
Corporate America translates into layoffs and lower pay that will help everyone. Because these nations can
for workers. Little wonder the West is suffering from throw more brains at technical problems at a fraction
future shock. Each new Chinese corporate take-over of the cost, their contributions to innovation will grow
bid or revelation of a major Indian outsourcing deal (Exhibit 5).
elicits howls of protest by U.S. politicians. Washington
think tanks are publishing thick white papers charting Consumers Rising
China’s rapid progress in microelectronics, nanotech,
and aerospace—and painting dark scenarios about American business isn’t just shifting research work
what it means for America’s global leadership. because Indian and Chinese brains are young, cheap,
Such alarmism is understandable. But the U.S. and and plentiful. In many cases, these engineers com-
other established powers will have to learn to make room bine skills—mastery of the latest software tools, a
for China and India. For in almost every dimension—as knack for complex mathematical algorithms, and flu-
consumer markets, investors, producers, and users of ency in new multimedia technologies—that often sur-
energy and commodities—they will be 21st-century pass those of their American counterparts. As Cisco’s
heavyweights (Exhibit 3). The growing economic might Scheinman puts it: “We came to India for the costs, we
will carry into geopolitics as well. China and India are stayed for the quality, and we’re now investing for the
more assertively pressing their interests in the Middle innovation.”
EXHIBIT 3
Surging in Tech Adoption
China and India are the most important growth markets
INDIA CHINA U.S.
MILLIONS OF PEOPLE MILLIONS OF PEOPLE
600 600
RESIDENTIAL INTERNET CELLULAR PHONE USERS
SUBSCRIBERS
450 450
300 300
150 150
0 0
’03 ’04 ’05 ’06 ’07 ’08 ’09 ’03 ’04 ’05 ’06 ’07 ’08 ’09
EST. EST.
Data: Ovum Ltd., Gartner Dataquest

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EXHIBIT 4
CEMENT 47%
COTTON 37%
RICE 32%
COAL 30%
CRUDE STEEL 26%

CHINA’S
ALUMINUM 21% ESTIMATED
SHARE OF
COPPER 20% GLOBAL
CONSUMPTION
IN 2005*
WHEAT 16%
OIL 8%
0 10 20 30 40 50
*2004 FOR CEMENT AND METALS
Data: U.S. Geological Survey, Energy Dept, Agriculture Dept.
EXHIBIT 5
China and India are racing ahead of the U.S. in numbers of young professionals*
INDIA CHINA U.S.
MILLIONS MILLIONS THOUSANDS
3.0 2.5 900
2.4 2.0 800
1.8 1.5 700
1.2 1.0 600
0.6 0.5 500

FINANCE AND ENGINEERING LIFE
ACCOUNTING SCIENCES
0 0 0
’03 ’04 ’05 ’06 ’07 ’08 ’03 ’04 ’05 ’06 ’07 ’08 ’03 ’04 ’05 ’06 ’07 ’08
EST. EST. EST.
*CUMULATIVE TOTAL NUMBER OF UNIVERSITY GRADUATES WITH SEVEN OR FEWER YEARS OF EXPERIENCE
Data: McKinsey Global Institute
A rising consumer class also will drive innovation noticed is that India’s consumer market is on the same
(Exhibit 6). This year, China’s passenger car market is explosive trajectory as China five years ago. Since
expected to reach 3 million, No. 3 in the world. China 2000, the number of cellular subscribers has rocketed
already has the world’s biggest base of cell phone from 5.6 million to 55 million.
subscribers—350 million—and that is expected to near What’s more, Chinese and Indian consumers and
600 million by 2009. In two years, China should over- companies now demand the latest technologies and
take the U.S. in homes connected to broadband. Less features. Studies show the attitudes and aspirations of

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EXHIBIT 6 mere 6% of global gross domestic product—half that

of Japan. They must keep growing rapidly just to pro-
vide jobs for tens of millions entering the workforce
annually, and to keep many millions more from crash-
A Profile of Youth in ing back into poverty. Both nations must confront
India and China ecological degradation that’s as obvious as the smog
shrouding Shanghai and Bombay, and face real risks
of social strife, war, and financial crisis. Increasingly,
CHINA INDIA
such problems will be the world’s problems. Also, with
wages rising fast, especially in many skilled areas, the
66% 62% cheap labor edge won’t last forever. Both nations will
OF YOUNG OF YOUNG SINGLE go through many boom and harrowing bust cycles.
CHINESE ADULTS WOMEN SAY IT IS O.K. And neither country is yet producing companies like
REGARD THEMSELVES TO HAVE FAULTS THAT
AS INDIVIDUALISTS OTHERS CAN SEE Samsung, Nokia, or Toyota that put it all together, devel-
oping, making, and marketing world-beating products.
23% 76% Both countries, however, have survived earlier cri-

ses and possess immense untapped potential. In China,
OF YOUNG CHINESE OF YOUNG SINGLE serious development only now is reaching the 800
ADULTS SAY IT IS WOMEN SAY
NOT IMPORTANT TO THEY SHOULD DECIDE million people in rural areas, where per capita annual
HAVE A CHILD WHEN TO HAVE income is just $354. In areas outside major cities,
A CHILD wages are as little as 45¢ an hour. “This is why China
can have another 20 years of high-speed growth,” con-
64% 51% tends Beijing University economist Hai Wen.
Very impressive. But India’s long-term potential
OF YOUNG ADULTS OF YOUNG URBAN
SAY MARRIED MEN WOMEN SAY A BIG may be even higher. Due to its one-child policy, China’s
SHOULD DO HOUSE AND CAR ARE
HOUSEWORK KEY TO HAPPINESS working-age population will peak at 1 billion in 2015
and then shrink steadily. China then will have to pro-
Data: Grey Global Group
vide for a graying population that has limited retire-
ment benefits. India has nearly 500 million people
today’s young Chinese and Indians resemble those of under age 19 and higher fertility rates. By mid-century,
Americans a few decades ago. Surveys of thousands of India is expected to have 1.6 billion people—and 220
young adults in both nations by marketing firm Grey million more workers than China. That could be a
Global Group found they are overwhelmingly optimis- source for instability, but a great advantage for growth
tic about the future, believe success is in their hands, if the government can provide education and opportu-
and view products as status symbols. In China, it’s nity for India’s masses. New Delhi just now is pushing
fashionable for the upwardly mobile to switch high-end to open its power, telecom, commercial real estate and
cell phones every three months, says Josh Li, managing retail sectors to foreigners. These industries could lure
director of Grey’s Beijing office, because an old model big capital inflows. “The pace of institutional changes
suggests “you are not getting ahead and updated.” That and industries being liberalized is phenomenal,” says
means these nations will be huge proving grounds Chief Economist William T. Wilson of consultancy
for next-generation multimedia gizmos, networking Keystone Business Intelligence India. “I believe India
equipment, and wireless Web services, and will play has a better model than China, and over time will sur-
a greater role in setting global standards. In consumer pass it in growth.”
electronics, “we will see China in a few years going For its part, China has yet to prove it can go beyond
from being a follower to a leader in defining consumer- forced-march industrialization. China directs massive
electronics trends,” predicts Philips Semiconductors investment into public works and factories, a wildly
Executive Vice-President Leon Husson. successful formula for rapid growth and job crea-
For all the huge advantages they now enjoy, India tion. But considering its massive manufacturing out-
and China cannot assume their role as new superpow- put, China is surprisingly weak in innovation. A full
ers is assured. Today, China and India account for a 57% of exports are from foreign-invested factories,

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and China underachieves in software, even with 35 India has sophisticated manufacturing knowhow.
software colleges and plans to graduate 200,000 Tata Steel is among the world’s most-efficient producers.
software engineers a year. It’s not for lack of genius. The country boasts several top precision auto parts
Microsoft Corp.’s 180-engineer R&D lab in Beijing, companies, such as Bharat Forge Ltd. The world’s big-
for example, is one of the world’s most productive gest supplier of chassis parts to major auto makers,
sources of innovation in computer graphics and lan- it employs 1,200 engineers at its heavily automated
guage simulation. Pune plant. India’s forte is small-batch production of
While China’s big state-run R&D institutes are close high-value goods requiring lots of engineering, such as
to the cutting edge at the theoretical level, they have yet power generators for Cummins Inc. and core compo-
to yield many commercial breakthroughs. “China has nents for General Electric Co. CAT scanners.
a lot of capability,” says Microsoft Chief Technology What holds India back are bureaucratic red tape,
Officer Craig Mundie. “But when you look under the rigid labor laws, and its inability to build infrastructure
covers, there is not a lot of collaboration with indus- fast enough. There are hopeful signs. Nokia Corp. is
try.” The lack of intellectual property protection, and building a major campus to make cell phones in Madras,
Beijing’s heavy role in building up its own tech com- and South Korea’s Pohang Iron & Steel Co. plans a
panies, make many other multinationals leery of doing $12 billion complex by 2016 in Orissa state. But it will
serious R&D in China. take India many years to build the highways, power
China also is hugely wasteful. Its 9.5% growth rate plants, and airports needed to rival China in mass manu-
in 2004 is less impressive when you consider that $850 facturing. With Beijing now pushing software and
billion—half of GDP—was plowed into already-glutted pledging intellectual property rights protection, some
sectors like crude steel, vehicles, and office buildings. Indians fret design work will shift to China to be closer
Its factories burn fuel five times less efficiently than in to factories. “The question is whether China can move
the West, and more than 20% of bank loans are bad. from manufacturing to services faster than we can
Two-thirds of China’s 13,000 listed companies don’t solve our infrastructure bottlenecks,” says President
earn back their true cost of capital, estimates Beijing Aravind Melligeri of Bangalore-based QuEST, whose
National Accounting Institute President Chen Xiaoyue. 700 engineers design gas turbines, aircraft engines, and
“We build the roads and industrial parks, but we sacri- medical gear for GE and other clients.
fice a lot,” Chen says. However the race plays out, Corporate America
India, by contrast, has had to develop with scarcity. has little choice but to be engaged—heavily. Motorola
It gets scant foreign investment, and has no room to illustrates the value of leveraging both nations to lower
waste fuel and materials like China. India also has costs and speed up development. Most of its hardware
Western legal institutions, a modern stock market, is assembled and partly designed in China. Its R&D
and private banks and corporations. As a result, it is center in Bangalore devises about 40% of the software
far more capital-efficient. A BusinessWeek analysis of in its new phones. The Bangalore team developed the
Standard & Poor’s Compustat data on 346 top listed multimedia software and user interfaces in the hot
companies in both nations shows Indian corporations Razr cell phone. Now, they are working on phones that
have achieved higher returns on equity and invested display and send live video, stream movies from the
capital in the past five years in industries from autos to Web, or route incoming calls to voicemail when you
food products. The average Indian company posted a are shifting gears in a car. “This is a very, very critical,
16.7% return on capital in 2004, VS. 12.8% in China. state-of-the-art resource for Motorola,” says Motorola
South Asia President Amit Sharma.
Small-Batch Expertise Companies like Motorola realize they must succeed
in China and India at many levels simultaneously to
The burning question is whether India can replicate stay competitive. That requires strategies for winning
China’s mass manufacturing achievement. India’s info- consumers, recruiting and managing R&D and profes-
tech services industry, successful as it is, employs fewer sional talent, and skillfully sourcing from factories.
than 1 million people. But 200 million Indians subsist “Over the next few years, you will see a dramatic gap
on $1 a day or less. Export manufacturing is one of opening between companies,” predicts Jim Hemerling,
India’s best hopes of generating millions of new jobs. who runs Boston Consulting Group’s Shanghai practice.

Confirming Pages
EXHIBIT 7 Growth Obstacles

Plenty of forces can still throw the Chinese and Indian
economies far off course. The economic fundamentals
of both nations, with their enormous populations of
PERCENTAGE OF WORLD young workers and consumers, point to strong growth
GROSS DOMESTIC PRODUCT
CHINA 4% INDIA 2%
for decades under almost every forecast. But it is instruc-
JAPAN 12%
tive to remember that financial crashes, coups, political
OTHER 20% strife, and plain bad management have derailed many
U.S. 28%
other miracle economies from Southeast Asia to Latin
EU 34%
America. And the same huge populations that can trans-
late into economic power for China and India also could
2004 prove to be a double-edged sword if social, political,
INDIA 5%
and environmental challenges are not deftly managed.
JAPAN 7% Indeed, growth doesn’t have to slow all that much to
CHINA 15% OTHER 21% pose serious social problems. Both China and India need
U.S. 27%
annual growth of at least 8% just to provide jobs for the
EU 25%
tens of millions joining the workforce each year. Fear of
worker unrest is a big reason Beijing has kept stoking
2025 EST. its boom with massive lending and growth in the money
OTHER 10%
supply, despite economists’ warnings that it is setting the
stage for a nasty bust. If India grows only 6.5% a year,
INDIA 17% which seems a respectable rate, its jobless rate would
U.S. 26%
CHINA 28% still jump, resulting in another 70 million unemployed
EU 15%
by 2012, forecasts India’s Planning Commission.
Slower growth also could keep China and India
JAPAN 4% from fulfilling the widespread predictions that they
2025 EST. will become superpowers. For example, in forecasting
Data: Keystone India
that India will rank just behind the U.S. as the world’s
No. 3 economy by mid-century, with a gross domestic
product of $30 trillion, Goldman, Sachs & Co. assumes
8.5% average annual growth. But what if India grows at
“It will be between those who get it and are fully less than 6%, its average for the past 20 years? By 2050,
mobilized in China and India, and those that are still it would have only a $7.3 trillion economy—smaller
pondering.” than Taiwan’s even then and just 2.6% of global GDP,
In the coming decades, China and India will disrupt notes Stephen Howes, the World Bank’s former chief
workforces, industries, companies, and markets in India economist. Worse, India’s masses would remain
ways that we can barely begin to imagine (Exhibit 7). extremely poor. “If you don’t grow fast enough, will
The upheaval will test America’s commitment to the you have social forces that bring everything to a stale-
global trade system, and shake its confidence. In the mate?” asks Infosys Technologies Ltd. CEO Nandan
19th century, Europe went through a similar trauma M. Nilekani. “That’s the worry.”
when it realized a new giant—the U.S.—had arrived. To achieve the high growth predictions, China and
“It is up to America to manage its own expectation India will have to overcome formidable challenges.
of China and India as either a threat or opportunity,” Some of the biggest:
says corporate strategist Kenichi Ohmae. “America
should be as open-minded as Europe was 100 years Environment
ago.” How these Asian giants integrate with the rest Both countries have paid a steep ecological price for
of the world will largely shape the 21st-century global rapid industrial and population growth, with millions
economy. of deaths attributed to air and water pollution each year.

Confirming Pages
Air quality in big cities like New Delhi, Chongqing, Financial Crisis
and Bombay is among the world’s worst. And forests Debt and currency crises have derailed many high-
are vanishing at alarming rates. flying emerging markets. India needed an International
Enforcement of environmental laws in both nations Monetary Fund bailout in 1991. China withstood the
is poor. Many power plants and factories depend on 1997 Asian financial crisis mainly because they lack
coal and don’t invest in clean technologies. China is convertible currencies. Also, Beijing controls the
one of the world’s most wasteful users of oil. If it does banks. Bailouts and the banks’ near-monopoly over
not act quickly, the long-term costs of health problems China’s vast domestic savings have kept them solvent
linked to the environment and the required cleanup will despite mountains of bad loans to state firms.
skyrocket. A growing scarcity of water in both nations In 2006, however, Beijing will start letting for-
could slow industry within two decades. eign banks compete for deposits and domestic loans.
That could put more financial pressure on state banks.
Political Backlash
China also is starting to loosen its currency controls
China’s Communist Party harshly represses dissent. a bit. China has plenty of foreign reserves now. But
But virtually each week brings new reports of big pro- if Beijing can’t whip its banks into shape, there’s a
tests in cities and villages over corruption, pollution, or danger that financial market liberalization will go
worker abuse. They underscore China’s lack of demo- wrong, leading to a crash. India’s financial system is in
cratic institutions and the widening gap between rich stronger shape, but its public finances remain a mess,
and poor. Serious challenges to Communist rule can with budget deficits at the federal and state level reach-
still erupt, especially if the economy stalls. Judging ing 10% of GDP.
from history, the process could be tumultuous.
India has a democracy, but it also has extremely Health
unbalanced growth and rampant corruption. The sur- Perhaps China’s biggest worry over the long term is
prise electoral defeat of the ruling Bharatiya Janata inadequate medical care for its rapidly aging popula-
Party by a more populist coalition led by Sonia Gandhi’s tion (Exhibit 8). In 20 years, China will have an esti-
Congress Party in 2004 served as a warning of mass mated 300 million people age 60 or older. Yet only one
discontent. The new government also is reform minded, in six Chinese workers now has a pension plan, and just
but the pace of economic liberalization has slowed. 5% have guaranteed medical benefits. What’s more,
Further electoral setbacks for reformers are possi- many retirees will not be able to rely on children for
ble if the poor don’t see the benefits of growth. Ten- support. Beijing promises to build a broader safety net,
sions between Hindus and Muslims have eased after but adequate health care and pensions could consume
bloody riots in 2003 and 2004. But communal violence a huge portion of GDP and deplete China’s economic
remains a threat. strength in the future.
EXHIBIT 8
The Numbers Are Ominous
1 30 203
Million Million Million
PREMATURE DEATHS INDIANS AND WORKERS WITHOUT
EACH YEAR IN CHINESE PROJECTED FULL-TIME
CHINA AND INDIA TO BE INFECTED EMPLOYMENT BASED
ATTRIBUTED TO WITH THE HIV/AIDS ON UNOFFICIAL
AIR POLLUTION VIRUS BY 2010 ESTIMATES
Data: National intelligence Data: CIA World Factbook
Council of India, U.N. Program Based on a 9.2% unemployment
Data: World Bank on AIDS rate in India and 20% in China

Confirming Pages
Case 2-4 Johnson & Johnson 177
Both nations also could face full-blown crises possess nuclear weapons, so a war could be cata-
with AIDS, tuberculosis, avian flu, and other infectious strophic. New Delhi and Islamabad have recently eased
diseases, and their health systems have been slow to tensions and begun peace talks. But the rise to power
mobilize. At least 5 million Indian adults are infected of a radical Islamic regime in Pakistan, or election of a
with HIV, one of the world’s highest rates outside sub- stridently Hindu nationalist government in India, could
Saharan Africa. India’s National Intelligence Council easily reignite tensions. China’s biggest flash point
predicts the number could pass 20 million in 2010. The remains Taiwan. Beijing has cooled its fiery rhetoric
U.N. estimates the number of Chinese with HIV could lately, but still vows to invade should the island declare
hit 10 million in five years. Some 200,000 Chinese also independence. Any war in the Taiwan Strait would
die annually of TB. And a serious flu epidemic could likely involve the U.S. and possibly Japan—China’s
kill millions. “Many investors don’t appreciate the eco- two biggest trade partners—and paralyze shipping in
nomic damage a serious outbreak would cause in our and out of China’s southern ports. It also would likely
crowded cities,” says Subroto Bagchi, chief operating result in long-term Sino-U.S. tensions that would spill
officer of Bangalore info-tech services firm MindTree into trade.
Consulting Ltd. It’s too much to expect for any developing nation
to avoid military, financial, environmental, and health
War crises for decades. But the test for a great power is how
India and neighboring Pakistan have fought three times well it manages a great crisis.
since their independence in 1947—and have had many Source: Pete Engardio, “Crouching Tigers, Hidden Dragons,”
border skirmishes over Kashmir. Now, both nations BusinessWeek, August 22/29, 2005, 52–61.
Case 2-4 organized into three divisions: drugs, medical devices

and diagnostics, and consumer products. Much of the
Johnson & Johnson company’s growth in recent years has come from phar-
maceuticals; they accounted for almost half of J&J’s
Lots of executives at Johnson & Johnson have stories sales and 61% of its operating profits last year. With
about William C. Weldon’s powers of persuasion. The revenue of $36 billion, J&J is one of the largest health-
onetime drug salesman who now leads the health-care care companies in the U.S. That allows it to take bigger
giant is famed for his ability to convince, cajole, or risks: When a surgical device business lost some $500
sometimes just sweet-talk colleagues into seeing things million between 1992 and 1995, J&J hardly felt it.
his way. A couple of years ago, Dr. Per A. Peterson, Consumers know Johnson & Johnson for its Band-
the chief of pharmaceutical research and development, Aids and baby powder. But competitors know the com-
was fed up with personnel headaches and told Wel- pany as a fierce rival that boasts a rare combination of
don he was thinking of leaving the company. The next scientific expertise and marketing savvy. It regularly
morning, Peterson, who lives minutes from Weldon in develops or acquires innovative products and then sells
central New Jersey, got a call from the boss at 5:30, them more aggressively than almost anyone around.
inviting him over for breakfast. As Weldon tended to Even if a hospital might prefer to purchase its surgical
the skillet, the two men discussed Peterson’s concerns. tools from one company and its sutures from another,
And then they talked some more: Their conversation it could likely end up buying both from J&J because
lasted well into the afternoon. Eventually, Peterson J&J offers favorable prices to hospitals that buy the
agreed to stay, and within a week Weldon had made the whole package. J&J can also trade on its “heritage,”
changes Peterson sought. “What else can you say to a as Weldon calls it, when it comes to persuading doc-
guy who cooks you an omelette at six in the morning?” tors to try its new drugs and devices. Or when it comes
says Peterson with a laugh. “You say yes.” to persuading consumers: When J&J launched anemia
Weldon, 54, and one year into the job, will need those drug Procrit in 1991, few expected it to make much of
skills in spades as he guides J&J in the new century. a difference to the company’s performance. Not only
The 117-year-old company is an astonishingly com- did J&J spend millions to educate physicians about the
plex enterprise, made up of 204 different businesses condition, it also ran a series of ads on television—an

Confirming Pages
unusual move considering that the drug is marketed own finance and human resources departments, for
specifically to treat anemia in chemotherapy patients. example. While this degree of decentralization makes
But it worked: Procrit is now J&J’s best-selling drug. for relatively high overhead costs, no chief executive,
The company Weldon inherited from his predeces- Weldon included, has thought that too high a price to
sor, Ralph S. Larsen, has been one of the most consist- pay. Johnson & Johnson has been able to turn itself
ent, most successful health-care companies for years. into a powerhouse precisely because the businesses it
Others around it are suffering as patents for important buys, and the ones it starts, are given near-total auton-
drugs expire with little of real consequence to replace omy. That independence fosters an entrepreneurial
them. That’s expected in an industry so dependent on attitude that has kept J&J intensely competitive as oth-
the unpredictable pace of scientific innovation. But not ers around it have faltered.
at J&J. The company is famed for delivering at least Now, though, the various enterprises at J&J can no
10% earnings growth year in and year out going back longer operate in near isolation. Weldon believes, as
nearly two decades. In the first quarter, it reported a do most others in the industry, that some of the most
13% rise. Its stock price, meanwhile, has increased important breakthroughs in 21st century medicine will
from less than $3, split-adjusted, in the mid-1980s to come from the ability to apply scientific advances in
almost 20 times that now. Over the past two years, one discipline to another. The treatment of many dis-
as the Standard & Poor’s 500-stock index has fallen eases is becoming vastly more sophisticated: Sutures
28.1%, J&J stock has increased 19.4%. And in 2002, are coated with drugs to prevent infections; tests based
J&J earned $6.8 billion (excluding special charges), on genomic research could determine who will respond
compared with $5.9 billion the previous year. to a certain cancer drug; defibrillators may be linked to
Maintaining that record could be Weldon’s biggest computers that alert doctors when patients have abnor-
challenge: Just to keep up, he must in essence create mal heart rhythms.
a new $4 billion business every year. But J&J’s crucial The company should be perfectly positioned to
drug business is finally succumbing to the pressures profit from this shift toward combining drugs, devices,
slowing down the rest of the industry. Procrit sales were and diagnostics, claims Weldon, since few companies
nearly flat in the first quarter because of a new rival, will be able to match its reach and strength in those
news that sent the stock down 3% in one day. And like three basic areas (Exhibit 1). “There is a convergence
its peers, J&J doesn’t have much coming out of its labs that will allow us to do things we haven’t done before,”
now. Meanwhile, its new drug-coated stent has been he says. Indeed, J&J has top-notch products in each of
held up at the Food & Drug Administration. Approval those categories. It has been boosting its research and
still seems highly likely. But if the device does not get development budget by more than 10% annually for
the O.K., it would be a huge blow to J&J. the past few years, which puts it among the top spend-
What makes matters worse for Weldon is that the ers, and now employs 9,300 scientists in 40 labs around
other component of J&J’s growth—acquisitions—could the world.
become more problematic, too. Over the past decade, But J&J can cash in only if its fiercely independent
J&J has bought 52 businesses for $30 billion; 10% to businesses can work together. In effect, Weldon wants
15% of its top-line growth each year comes from such J&J to be one of the few companies to make good on
investments. But to buy something that really affects that often-promised, rarely delivered idea of synergy.
overall performance is a different proposition for a $36 To do so, he has to decide if he’s willing to put J&J’s
billion company than it is for a $10 billion company. famed autonomy at risk. For now, Weldon is creat-
“You get to a point where finding acquisitions that fit ing new systems to foster better communication and
the mold and make a contribution becomes increas- more frequent collaboration among J&J’s disparate
ingly difficult,” warns UBS Warburg analyst David operations.
Lothson. “This puts pressure on the sustainability of Already J&J has been inching toward this more
this strategy, and ultimately it could break down.” cohesive approach: Its new drug-coated stent, which
J&J’s success has hinged on its unique culture and could revolutionize the field of cardiology, grew out
structure. But for the company to thrive in the future, of a discussion in the mid-1990s between a drug re-
that system has to change. Each of its far-flung units searcher and one in J&J’s stent business. Now Weldon
operates pretty much as an independent enterprise. has to promote this kind of cooperation throughout
Businesses set their own strategies; they have their the company without quashing the entrepreneurial

Confirming Pages
EXHIBIT 1 It’s Not Really about Baby Powder is such an intense athlete that he was just a sprint away
from ruining his knee altogether when he finally gave
Pharmaceuticals
up playing basketball. It’s not easy for him to keep a
The most profitable and fastest-growing of J&J’s
respectable distance from his managers now. “It’s like
businesses, but expected to slow considerably
a barroom brawl [where] you are outside looking in
as competition for its key drugs increases. The
company wants to use drug-delivery technology when you want to be in the middle of it,” he says.
to come up with new formulations of existing Weldon became famous for setting near-impossible
products. goals for his people and holding them to it. “There
SHARE OF SALES 47.2%
was rarely an empty suit around Bill,” says one former
J&Jer. “If you weren’t pulling your weight, you were
SHARE OF OPERATING PROFITS 60.9%
gone.” In the 1990s, when Weldon ran a business that
Devices & Diagnostics
sold surgical tools, executives back at headquarters in
Its drug-coated stent could be a multibillion-dollar
New Brunswick, N.J., used to systematically upgrade
blockbuster. But with the FDA approval process drag-
the reviews he gave his employees.
ging on, J&J could also face a competing product
before year end. The diagnostic group hopes to With that in mind, consider what Weldon is willing
develop gene-based tests linked to promising new to do so that his changes don’t threaten J&J’s ecosystem:
treatments. restrain himself. Although he talks incessantly about
SHARE OF SALES 34.7%
synergy and convergence, the steps he’s actually tak-
SHARE OF OPERATING PROFITS 26.2%
ing to make sure his units cross-fertilize are measured
ones. He isn’t pushing specific deals on his managers.
Consumer
For example, industry sources say J&J has held on-
It’s the least profitable and slowest-growing of J&J’s
and-off talks with Guidant Corp., which makes implant-
businesses, but with widely known products such as
able defibrillators. That field of cardiovascular medicine
Johnson’s Baby Shampoo and Band-Aids, the opera-
tion cloaks the company in an image of decency is a growing market that’s perfectly suited for some of
that indirectly benefits every J&J sales rep. A key these emerging combination therapies. But Weldon isn’t
opportunity: over-the-counter versions of drugs leading the way in those talks. And he’s delegating cru-
that lose their patents. cial decisions about how to spend R&D dollars.
SHARE OF SALES 18.1% Weldon is subtly turning up the heat on coopera-
SHARE OF OPERATING PROFITS 12.9% tion between his different units, however. J&J experts
in various diseases have been meeting quarterly for
the past five years to share information. Weldon and
spirit that has made J&J what it is today. Cultivating James T. Lenehan, vice-chairman and president of J&J,
those alliances “would be challenging in any organiza- are now setting up two groups, focused on two diseases
tion, but particularly in an organization that has been (they won’t say which), that will work together more
so successful because of its decentralized culture,” says formally. After six months, each group will report on
Jerry Cacciotti, managing director at consulting firm potential strategies and projects.
Strategic Decisions Group. Weldon, like every other To understand Weldon’s vision for the new J&J, it’s
leader in the company’s history, worked his way up useful to look at how he reshaped the pharmaceutical
through the ranks. Among other things, it made him a operation when he took it over in 1998. At the time,
true believer in the J&J system. Whatever he hopes to J&J’s drug business was posting solid growth thanks to
achieve, he doesn’t expect to undermine that. popular products such as the anemia drug Procrit and
In many ways, Weldon personifies the Johnson & the anti-psychotic medication Risperdal. But the drug
Johnson ethos. Though he was one of the first J&J R&D operation was sputtering after several potential
executives to go casual in the 1990s and sometimes treatments had failed in late-stage testing. Weldon’s
schedules business lunches at his favorite burger joint solution was to create a new committee comprised of
in Manhattan, Weldon is compulsively competitive. R&D executives and senior managers from the sales
As he says, “it’s no fun to be second.” One of his first and marketing operations to decide which projects to
bosses recalls how Weldon badgered him to release green-light. Previously, those decisions were made
sales figures early because Weldon was desperate to largely by scientists in the company’s two major R&D
know if he had won a company competition. Weldon operations; there was no such thing as setting common

Confirming Pages
priorities. Weldon also created a new post to over- antifungal treatment, Nizoral, into a dandruff shampoo.
see R&D and gave the job to Peterson. “Some people Indeed, these kinds of products are one reason operat-
may have thought Bill curtailed their freedom,” says ing margins for the consumer business have increased
Peterson. “But we’ve improved the decision-making to from 13.8% in 2000 to 18.7% in 2002.
eliminate compounds that just won’t make it.” But perhaps the most promising result of this approach
Although most of the changes Weldon instituted in is J&J’s drug-coated stent, called Cypher (Exhibit 3).
the pharmaceutical business won’t yield real results A few years after that first meeting between research-
for years, there is some evidence that this new col- ers, J&J created teams from the drug business and the
laboration is working (Exhibit 2). Shortly after taking device operation to collaborate on manufacturing the
charge of the drug unit, Weldon visited J&J’s research stent, which props open arteries after angioplasty. “If
facility in La Jolla, Calif., to learn about the company’s we didn’t have all this [expertise],” Weldon says, “we’d
genomic studies. Researchers were focused on building probably still be negotiating with [outside] companies
a massive database using gene patterns that correlate to to put this together.” And to show that he is letting man-
a certain disease or to someone’s likely response to a agers mind their own businesses, Weldon says that he
particular drug. When they told Weldon how useful the only gets briefed about the stent’s progress every month
database could be for J&J’s diagnostic business, he in (though he does invite Robert W. Croce, the division
turn urged Lenehan, who oversees the unit, to send his head, to dinner for more casual updates). “They are the
people out. Now, Peterson says, the diagnostics team experts who know the marketplace, know the hospitals,
is developing a test that the drug R&D folks could use and know the cardiologists,” Weldon says of the Cypher
to predict which patients will benefit from an experi- team. “I have the utmost confidence in them.”
mental cancer therapy. If the test works, it could sig- With that empowerment, though, comes the clear
nificantly cut J&J’s drug-development costs. expectation that J&J’s experts will go after their mar-
Even the company’s fabled consumer brands are kets with the same tenacity Weldon displayed in his
starting to take on a scientific edge. Its new liquid Band- climb to the top. Before heading up the drug division,
Aid is based on a material used in a wound-closing Weldon made his reputation at J&J in the early ’90s as
product sold by one of J&J’s hospital-supply busi- head of a new unit, Ethicon Endo-Surgery Inc. Ethicon
nesses. And a few years ago, J&J turned its prescription Endo was supposed to establish itself in the emerging
field of endoscopic surgery. J&J did what only a com-
pany of its resources can: It poured hundreds of mil-
EXHIBIT 2 What Synergy Could Look Like at J&J lions into building a full line of tools for surgeons. And
Improved Drugs Weldon did what he does best: He went after the lead-
J&J’s pharmaceutical operation is working with the ing company, United States Surgical Corp., as if it were
company’s drug-delivery operation, Alza, to come a mortal threat.
up with a new formulation of the epilepsy drug Weldon spent much of his time on the road, traveling
Topamax. The drug has been shown to also pro- the country from his base in Cincinnati to meet with
mote weight loss, and this would make it a more surgeons and hospital executives. Once he canceled a
tolerable obesity treatment. flight home from San Diego after hearing that a poten-
New Medical Tests tial customer was wavering. He went back the following
A new diagnostic unit is working with data gener- morning to nail down the deal. Weldon often set more
ated by drug researchers; they could, for example, ambitious goals than headquarters did. Nick Valeriani,
develop a gene-based test to identify patients who was then vice-president of sales and marketing,
most likely to respond to experimental cancer
recalls: “We’d have a great year and Bill would say, ‘Nice
treatments.
job. Why couldn’t it have been 25% higher?’ ” By 1996,
Cutting-Edge Consumer Products J&J surpassed U.S. Surgical, which was later bought by
In 2002, J&J rolled out the new Band-Aid Brand Tyco International Ltd.
Liquid Bandage, a liquid coating that is applied That’s not to say that Weldon doesn’t understand the
to cuts on hard-to-cover areas like fingers and
power of positive reinforcement. Twice he wheedled
knuckles. The product is based on a material used
in a wound-closing product sold by J&J’s hospital-
higher bonuses for his managers out of New Brunswick.
products company, Ethicon. Another time at Ethicon Endo, he closed up shop for a
day of rest after a particularly harried couple of months.

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EXHIBIT 3 The Race to Keep Arteries Clear—and Rivals at Bay

There are a lot of “ifs” when it comes to Johnson & Johnson’s new drug-coated stent, called Cypher. The big-
gest question is timing: The stent could be a billion-dollar product this year if the Food & Drug Administration
approves it in time to give J&J a head start against rivals. A stent is used to prop open arteries after angioplasty;
the new device is coated with a drug that prevents those arteries from re-clogging. The agency has held off
giving its O.K. over a number of issues, including the shelf life of the stent. A short shelf life could hinder J&J’s
ability to meet initial market demand, since it wouldn’t be able to sell all the stents it has manufactured already.
The company says it has addressed all FDA concerns.
Even if the stent hits the market soon, as J&J has said, rivals won’t be far behind. Boston Scientific Corp. is
developing a stent coated with a different drug that it could launch by year’s end. And if the two devices are
equally effective, doctors may not favor J&J’s version. That’s because analysts say Boston Scientific’s metal stent
itself, as well as the system for inserting it into the body, is more flexible and easier to use.
Then there’s the risk of a backlash against the cost of J&J’s new stent. In 1994, when J&J introduced the first
widely used one, the company irked cardiologists with the stent’s steep price: $1,600. Nor had J&J gotten
additional Medicare reimbursement for hospitals. To make matters worse, it took the company three years to
develop a meaningful improvement on the original. The result is that J&J lost its dominance in a crucial market
it helped to create. Robert W. Croce, company group chairman for Cordis, the unit developing the stent, says
J&J has successfully lobbied for increased Medicare reimbursement in advance this time (good thing, since the
stent might go for as much as $3,000) and plans to roll out a new and better version every 15 months.
But Brue Chandler, executive vice-president at St. Joseph’s Health System in Atlanta, says he has already
heard Cordis sales representatives mention the possibility of discounts on other company products to help
offset the price of the stent. “I find that objectionable, because it doesn’t go to the core issue of introducing
a product at a [reasonable] price,” says Chandler. He adds: “They’ve already begun alienating the purchasing
market.” J&J’s Croce says the company will work with hospitals to deal with their concerns about the stent’s
cost. And it won’t do so by offering selective discounts on other products. Still, if J&J isn’t careful, history could
repeat itself.
By Amy Barrett in New Brunswick, N.J.
How Cypher Works

1. A catheter, with a balloon at the tip, is threaded into the patient through the femoral artery in the groin
until it reaches the clogged artery. The balloon is expanded, opens the artery, and is removed.
2. A catheter, now with a stent at the end with a balloon inside, is inserted. When it reaches the artery, the
balloon is inflated, propping open the stent. The catheter and balloon are removed, leaving the stent in place.
3. Over time, the drug sirolimus, which is coated onto the stent, is released into the blood vessel wall. It acts to
block the creation of excessive amounts of scar tissue that could reclog the artery.
He never told anyone at headquarters. And no one in Not everybody appreciated Weldon’s demands.
New Brunswick ever said a word about it. “Hell, you None would speak for attribution, but several former
are the goddamn boss,” he says. “Sometimes it is better executives at Ethicon Endo say Weldon alienated those
to beg forgiveness than to ask permission.” he felt weren’t part of the team. “He is an intimida-
And for those executives who fell short, Weldon tor and a dominator,” says one former executive who
made it clear he didn’t like to be disappointed. When claims Weldon turned on him after he opposed an
a new J&J drug business, Centocor Inc., failed to meet acquisition.
the aggressive sales goals it set for 2000, Weldon was Weldon hasn’t really ever taken much for granted.
at the offices in Malvern, Pa., before the week was out. His father was a stagehand on Broadway for several
David P. Holveck, former company group chairman of years. While his mother, a seamstress, worked on
Centocor who now runs J&J’s venture-capital arm, says costumes for the ballet and theater, Weldon would
of Weldon: “He is a man of few words. But his body lan- watch the shows from backstage. She handled Marilyn
guage was very clear: In this game there are two strikes. Monroe’s wardrobe the night the actress sang Happy
In 2001, we were expected to get it right.” They did. Birthday to President John F. Kennedy in 1962, and

Confirming Pages
she retired last year at the age of 80. “My parents With J&J’s blockbusters slowing, Weldon may
were very hardworking, union people,” Weldon says. expect his successor at the drug unit to do something
“It’s a tough life.” dramatic. That’s what he did two years ago when he
When Weldon was in elementary school, the family completed the company’s biggest acquisition ever:
moved to Ridgewood, N.J., which former classmates buying drug-delivery player Alza Corp. for $13.2
describe as a wealthy and somewhat socially competi- billion to shore up the business. There are supposed
tive town. There, Weldon grew up in one of the less synergies here too, he says. Alza’s technology could
prosperous neighborhoods. He was an indifferent stu- help J&J devise safer and more effective formulations of
dent but a determined athlete who played on both the existing drugs. Among them: a new sustained-release
basketball and football teams. version of the epilepsy drug Topamax that could be
Weldon put himself through Quinnipiac University used to treat obesity.
in Hamden, Conn., by working as a mover in Newark, But buying growth is likely to be more of a chal-
N.J., on weekends and holidays. He says he got seri- lenge for J&J these days. For one thing, nearly every
ous about his studies after he married his high school pharmaceutical operation around is looking to make
sweetheart, Barbara Dearborn, midway through col- deals. And there are relatively few companies with
lege. Shortly after graduating with a major in biology, products that are far enough along and important
Weldon had his one and only interview at J&J. Howard enough to make a real difference to J&J.
Klick, who hired him as a sales rep at the McNeil Phar- Of course, the drug business’ problems now fall to
maceutical unit, recalls asking him for a sales pitch on its new boss, Christine A. Poon, whom Weldon helped
a pen. Weldon took the pen apart, then gave Klick the recruit from Bristol-Myers Squibb Co. But Weldon still
hard sell. “He was hungry,” Klick says. “He had fire in jumps in every now and then. One weekend earlier this
the belly.” year, several senior executives were hammering out
He’ll need that drive if he’s to maintain J&J’s growth details on the $2.4 billion acquisition of Scios Inc., a bio-
trajectory. At this point, most of J&J’s important drugs tech company that has a drug for congestive heart fail-
are under assault from competitors. Growth of the com- ure. They called Weldon at home to ask for his input on
pany’s biggest-selling product, the $4.3 billion Procrit one point. Weldon decided to go to the office to give his
franchise, has stalled in the face of Aranesp, a drug answer. And he stayed until well after midnight. Weldon
from archrival Amgen Inc. And side-effect problems says he wanted to make an appearance because it was
have plagued the European version, called Eprex. As a Poon’s first major acquisition. “I wanted to be there, if
result, Procrit, which grew at a 20%-plus rate over the nothing else, to give her some moral support,” he says.
past few years, may actually post a 2% decline in world- But you know he got a thrill from being back in the
wide sales in 2003, according to J.P. Morgan Securi- thick of things. As Weldon leads the company into a
ties analyst Michael Weinstein. Meanwhile, J&J’s $1.3 new era, he’ll have to be careful not to cross the line
billion rheumatoid arthritis drug Remicade faces com- between supporting his executives and encroaching
peting products from Amgen and Abbott Laboratories. on their territory. Their autonomy has been central to
Weldon downplays the threat. He argues that Remi- Johnson & Johnson’s success. To refine the J&J way,
cade has tremendous potential because it can be used Weldon will have to be among the most disciplined and
to treat other conditions, including Crohn’s disease, restrained of executives. Keeping a company on top
and that Procrit will continue to dominate the anemia can be just as hard as getting it there.
market. And J&J does have 56 drugs in late-stage test- Source: Amy Barrett, “Staying on Top,” BusinessWeek, May 5,
ing (though only eight are truly new). 2003, 60–68.

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Confirming Pages

Capabilities for Learning

cra81004_ch05_129-155.indd 129 10/31/07 2:43:33 PM

130 Part Two Markets, Segments, and Customer Value

Market-Driven Strategy, Market Sensing, and Learning Processes

cra81004_ch05_129-155.indd 130 10/31/07 2:43:34 PM

Chapter 5 Capabilities for Learning About Customers and Markets 131

Market Sensing Processes

cra81004_ch05_129-155.indd 131 11/2/07 12:51:21 PM

Global Feature International Market Sensing

Learning and Competitive Advantage

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Chapter 5 Capabilities for Learning About Customers and Markets 133

Learning About Markets

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134 Part Two Markets, Segments, and Customer Value

Barriers to Market Learning Processes

Marketing Information and Knowledge Resources

cra81004_ch05_129-155.indd 134 10/31/07 2:43:35 PM

Innovation Feature Customer Knowledge-Based

cra81004_ch05_129-155.indd 135 10/31/07 2:43:35 PM

Strategy Feature The New Design Team

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Chapter 5 Capabilities for Learning About Customers and Markets 137

EXHIBIT 5.1 Probability of the Event Occurring

* 1 = Disaster, 2 = Very bad, 3 = Bad, 4 = Neutral, 5 = Good, 6 = Very good, 7 = Ideal.

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138 Part Two Markets, Segments, and Customer Value

Specific Marketing Research Studies

cra81004_ch05_129-155.indd 138 10/31/07 2:43:48 PM

Chapter 5 Capabilities for Learning About Customers and Markets 139

Relationships with External Marketing Research Providers

EXHIBIT 5.3 Top Ten Global Marketing Research Firms in 2005

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140 Part Two Markets, Segments, and Customer Value

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Chapter 5 Capabilities for Learning About Customers and Markets 141

EXHIBIT 5.4 Research agency screening issues:

Existing Marketing Information Sources

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142 Part Two Markets, Segments, and Customer Value

Open Source Resources

Research Agency Resources

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Chapter 5 Capabilities for Learning About Customers and Markets 143

Creating New Marketing Information

Observation and Ethnographic Studies

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144 Part Two Markets, Segments, and Customer Value

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Internet Feature The Web and Marketing Information

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146 Part Two Markets, Segments, and Customer Value

Marketing and Management Information Systems

Marketing Information Systems

Management Information Systems

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Chapter 5 Capabilities for Learning About Customers and Markets 147

Marketing Decision-Support Systems