Chapter 1 – Drucker, Levitt, the Four Ps and the Chasm

Estimated Reading Time: 17 minutes

Think of the most successful and widely recognized brands – Coke, Walmart, Microsoft, Nike.   In any field, they likely have one thing in common: great marketing.  These companies prosper and expand by combining a few fundamental business concepts and practices:

• An acute understanding of customer needs,
• An astute awareness of their markets,
• The right price,
• Great salespeople and partners, and
• Successful introduction of new products. 

Not coincidentally, all of these features are essential elements of marketing.

Marketing is much more than Pantone colors, social media backlinks, and visually appealing direct mail pieces.  Marketing is strategy.  Marketing is science.  Marketing is the engine that creates customers and drives business.  Although these ideas might seem obvious, in reality many marketers do not embrace them.  This failure hurts both the marketers and the organizations they work for.

But where did these ideas come from? Modern marketing stands of the shoulders of many great thinkers.  In this chapter we focus on the writings of five particularly influential marketing giants – Peter Drucker, Ted Levitt, E. Jerome McCarthy, Geoffrey Moore, and Everett Rogers.  If your goal is to create a successful brand – and , of course, to craft a successful career in marketing – then understanding the power of marketing through the eyes of these giants is essential. Let’s begin by examining the writings of Peter Drucker.

Peter Drucker

Peter Drucker is widely recognized as a seminal figure in modern management, so it may seem strange to begin a book on marketing by examining his work.  The German-born Drucker is perhaps the best-known and most influential thinker on management theory and practice.  Among his many accomplishments, he

• Was one of the first writers to discuss corporate divisional structure,
• Coined the term “knowledge worker” before Bill Gates entered kindergarten,
• Created the concept of management by objective (the MBOs many marketing managers’ bonuses are based on today)
• Predicted the rise of outsourcing as a viable business strategy. 

 This list barely scratches the surface of the major contributions contained in his 39 books.  

Drucker’s views on marketing are direct and without pretense.   The fact that they come from a respected business management thinker, and not a marketing specialist, gives them added weight outside marketing departments, which is why we’re starting with him.

Let’s face it – many business executives are dismissive of marketing.  Few executives truly understand what marketing is and the power it holds.  To them, Marketing is the department that keeps the website current and pays an agency to create attention-getting ads.  Given the ubiquity of marketing in modern businesses, why do so many executives fail to appreciate its true value?  One possibility is that these individuals are simply unaware of all the work that goes into making the phone ring, encouraging a shopper to reach for your product, or enticing a prospective customer to respond to your online ad .  An alternative explanation is that the marketing they see practiced in their organizations is too tactical or poorly executed, which reinforces their (mis)impression of marketing’s role and contributions. 

Drucker flips this perception on its head.  Rather than focus on the effect, Drucker looks at the cause, which marketing has a lot to do with.   In “The Purpose and Objectives of a Business” (Chapter 3 in The Essential Drucker), he argues that the purpose of a business is neither to make a profit nor to maximize revenues by selling more product.  Those objectives are measures of a business, but they are not its purpose.   Rather, according to Drucker, business exists for only one reason – to serve the needs of its customers.  Drucker goes one step further: “There is only one valid definition of business purpose: to create a customer.” [1] Marketers can relate to this definition.  After all, does any other department spend as much time strategizing to identify, reach, appeal to, and maintain customers as marketing?

Drucker agrees with this assessment of the critical role of marketing.  In his own words: “Because the purpose is to create a customer, the business enterprise has two – and only these two – basic functions: marketing and innovation.”  True marketing, he argues, starts out with their customer, their wants, and their needs.  Truly understanding these needs and then working to deliver on them are the keys to creating customers. 

Drucker also debunks a common misconception concerning the relationship between the Sales and Marketing departments.  Most VPs of Marketing have heard their VPs of Sales tell them that Sales is Marketing’s customer.  This is actually a polite way of saying that Sales should be free to make demands on Marketing, and Marketing should give Sales what it wants.

In fact, as Drucker explains, the customer — and not the Sales department — is Marketing’s customer.  Marketing’s job is to understand what the customer needs and to feed that information back into the organization to help it meet the needs of the customer. 

Drucker takes this idea a step further:  “The aim of marketing is to know and understand the customer so well the product or service fits him and sells itself.”  He continues: “The aim of marketing is to make selling unnecessary.” (We strongly recommend you do not present this argument to your VP of Sales!)  Although this concept seems quite provocative, it is essentially sound: If a company can understand the market, meet its customers’ needs perfectly, innovate technically or economically to create the product or service, and then reach those customers, then how much selling is actually left? 

Drucker had a talent for examining what was right in front of us and presenting it in a plainspoken, straightforward way that was accessible to anyone, regardless of his or her function.  His reputation as a management guru may help you convey  the role of marketing to your executives.

Ted Levitt and Marketing Myopia

Sitting in the boardroom of a Boston-area software company years ago, one of our marketing colleagues, pounding the table, exhorted, “Remember, we’re not in the railroad business, we’re in the transportation business!”  What on earth was he talking about?  We were not in either of those businesses.

He was offering, as it turned out, an analogy, utilizing Ted Levitt’s most famous example of marketing myopia.  Levitt created this term to refer to a highly restrictive view that many business executives hold and the damage it can cause.  Levitt argued that had the railroad industry stepped back and taken a broader view – that it was actually in the transportation business – it could have rescued itself.   The rest, of course, is government-subsidized history.  In our colleague’s mind, the high-growth gravy train our software company rode was about to end, because we, too, were taking a limited view of our market.   In Marketing Myopia, Levitt sums up the fate of the railroad industry:

Less than 75 years ago, American railroads enjoyed a fierce loyalty among astute Wall Streeters.   European monarchs invested in them heavily.  Eternal wealth was thought to be the benediction for anybody who could scrape together a few thousand dollars to put into rail stocks.  No other form of transportation could compete with the railroads in speed, flexibility, durability, economy and growth potentials.

Even after the advent of automobiles, trucks and airplanes, the railroad tycoons remained imperturbably self-confident.  If you had told them 60 years before that in 30 years they would be flat on their backs, broke and pleading for government subsidies, they would have thought you totally demented[2].

Unfortunately, that is essentially what happened.  Today, in the United States, Amtrak survives only due to generous handouts from the U.S. government.  The hubris of their success blinded the railroad barons to the competition generated by other means of transportation, such as automobiles and commercial airlines.  And that word – transportation – is fundamental to Levitt’s thesis that the railroads defined themselves too narrowly – as players in the railroad business – and not more broadly – as players in the transportation business. This myopia ultimately prevented them from viewing the market more broadly.

Underlying marketing myopia are two basic tenets:

• Companies stop growing not because the market is saturated but because management fails to adapt to market conditions.
• An industry is a customer-satisfying process, not a goods-producing process. (Recall Drucker’s philosophy.) Businesses will be more successful if they concentrate on meeting customers’ needs rather than on simply selling products.

Levitt cites Hollywood as another case of myopic management.  Hollywood moguls, who perceived themselves as strictly in the movie business, viewed the introduction of television as a threat.  “Hollywood scorned and rejected TV when it should have welcomed it as an opportunity – an opportunity to expand into the entertainment business.[3]”  Another example of an industry that defined itself too narrowly and therefore missed an opportunity to broaden itself.  As Levitt noted at the time of his writing, the TV business is bigger than the movie business ever was .  Going further, rather than learn from this error, Hollywood in fact repeated it, first with the advent of the VCR and again with the introduction of DVDs.  Even today, Hollywood remains myopic, as exemplified by its failure to fully embrace online streaming of movies over the Internet. Based on this history, we have no doubt that some new disruptive innovation just over the horizon will once again cause agita for movie execs.  

Myopia stems from a belief in – and a reliance on – the concept of a growth industry.  Growth opportunities do exist, and smart companies organize to take advantage of them.  However, there will ultimately come a time when growth slows or stops.  At this point, companies that have assumed that their industry – meaning their product – is the key to their success will begin to decline.  As Levitt explains: “The history of every dead and dying growth industry shows a self-deceiving cycle of bountiful expansion and undetected decay.”  He identifies four conditions that typically assure this cycle:

• The belief that growth is assured by an expanding and more affluent population
• The belief that there is no competitive substitute for the industry’s major product
• Excessive faith in mass production and the advantages of rapidly declining unit costs resulting from increased output
• Preoccupation with a product that lends itself to carefully controlled scientific experimentation, improvement, and manufacturing cost reduction

To prevent myopic decision making that leads to decay, companies must first be cognizant of these misleading assumptions.  Simply relying on a growing population, or even expansion into new regions, is not adequate for long-term survival.  Neither is cost cutting if the compensating demand is not there.  Rather than focusing exclusively on their immediate competitors (those in the same industry), companies should be constantly on the lookout for new competitors that offer a substitute product or service – trucking over rail cargo transport, airplanes over trains for leisure travel.  Finally, improvements in manufacturing alone won’t guarantee success.

At this point you might be thinking, all of this sounds fine, but how is a company to know where it should move and how it should broaden?  Levitt addresses this issue in his accounts of primary examples – the railroads, Hollywood, petroleum, automobiles. In each case, the companies suffered because they were product oriented and not customer oriented.  Adopting a customer orientation enables companies to think like customers, understanding their needs and tradeoffs. 

In terms of marketing, Levitt argues that the emphasis on production leads to an emphasis on selling – a phenomenon that modern marketers can identify with.  This approach exacerbates the problem, “The difference between marketing and selling is more than semantic.  Selling focuses on the needs of the seller, marketing on the needs of the buyer.”[4]

Companies that avoid the pitfall of myopia come at things from the perspective of the customer.  They offer not what they have to sell, but what the buyer wants.  Again, although this may sound like a semantic difference, it is truly fundamental in the go-to-market plan.  Levitt supports this contention by debunking a popular misunderstanding about Henry Ford, a manufacturing and entrepreneurial legend:

We habitually celebrate him for the wrong reason – his production genius.  His real genius was marketing.  We think he was able to cut the selling price and therefore sell millions of $500 cars because his invention of the assembly line had reduced the costs.  Actually he invented the assembly line because he had concluded that at $500 he could sell millions of cars.   Mass production was the result, not the cause, of his low prices (author’s italics).

For an example of a company that truly understands its market, consider the case of Apple.  The company was originally named Apple Computer, and, as its name suggests, it focused exclusively on selling computers. Over time, however, it broadened its vision to embrace other innovative products such as music players, phones, tablets, and lots and lots of music and movies online.  To reflect this transformation, in 2007 the company changed its name from Apple Computer to simply Apple.    By2011, Apple sold more than 4 times as many iPods, iPhones, and iPads as Macs and Macbooks. [5] Moreover, its market cap and brand valuation are at an all-time high.

Levitt shined a light on what now seem like obvious failures of management.  We often wonder how and why large companies or entire industries fade or fail.  More often than not, the fundamental reason is a preoccupation with production, cost cutting and selling, rather than understanding the often evolving needs of customers.  With such a seminal work at our disposal, the most egregious example of myopia may simply be the failure to read this piece and heed its warnings.

McCarthy and the Four Ps

What is marketing?  Ask one hundred marketers, and you are likely to get one hundred different answers.  Consult the dictionary, and you find stolid definitions like the following: “The commercial functions involved in transferring goods from producer to consumer.” [6] But, what does that really mean?  And what exactly would a head of marketing be in charge of?

In his 1960 book Basic Marketing. A Managerial Approach, E. Jerome McCarthy, a marketing professor at Michigan State University, created a simplified model and mnemonic for the key elements of marketing.  His model is known as the Four Ps: product, price, place, and promotion.  McCarthy’s model was a simplification of earlier work on the key marketing ingredients, or “marketing mix,” by Neil Borden from Harvard Business School. 

Let’s take a closer look at McCarthy’s Four Ps.

Product –  Refers to the actual goods or services, and how they relate to the end-user’s needs and wants. The scope of a product also includes supporting elements such as warranties, guarantees, and customer service.

Price –  Refers to the process of setting a price for a product, including discounts. Although most often price is described in terms of currency, it doesn’t have to be.  What is exchanged for the product or services can be time, energy, or even attention.  

Place  – Indicates how the product gets to the customer; for example, point-of-sale placement and retailing. Also known as Distribution, place can refer to the channel by which a product or service is sold (e.g., online vs. retail), the geographic region, (e.g., Western Europe) or industry (e.g., Financial Services), and the target market segment (e.g., young adults, families, business people).

Promotion – Refers to the various strategies for promoting the product, brand, or company, including advertising, sales promotion, publicity, personal selling, and branding.

In practice, the Four Ps should be thought of as four levers.  To grow a business or to fix a faltering business, you need to employ one or more of the Four Ps.   Moving those levers up or down as needed will have a direct impact on the business.

McCarthy’s Four Ps are perhaps the most important concept a marketer can master.  You will be hard pressed to find a more concise and durable definition of marketing.  The Four Ps will serve you well when you need to determine whether you are working on the right things. 

Crossing the Chasm – Geoffrey Moore (and Everett Rogers)

Geoffrey Moore is well known in high-tech marketing circles.  Many experts treat Moore’s seminal book, Crossing the Chasm, as the Bible for bringing high-tech products to market.  His identification of the “chasm” in the selling process is perhaps his most valuable contribution, and it has earned him his status as a modern marketing guru. 

Just as McCarthy’s model was based on Borden’s prior work, Crossing the Chasm, published in 1991, is a refinement of the theories proposed by sociologist Everett Rogers. In his 1962 book Diffusion of Innovations, Rogers popularized the concept of the innovation adoption lifecycle, also known as the technology innovation lifecycle.  Diffusion of innovations is a theory that seeks to explain how, why, and at what rate new ideas and technology spread through cultures.  Rogers’ diffusion or lifecycle model is illustrated in Figure 1.

 

Interestingly, Rogers created the innovation adoption lifecycle to describe attitudes toward the purchase of hybrid seed by farmers in Iowa (though there is some dispute over whether the roots lie in corn or potato seeds).  Therefore, although Moore popularized this model within the context of high technology, it can be applied to any industry where innovations are introduced.

Rogers’s model displays a bell curve that covers five distinct categories of buyers, each of which makes up a percentage of the total market.  The yellow line shows the eventual 100 percent saturation of a market.  The categories are the Innovators, Early Adopters, Early Majority, Late Majority, and Laggards.  Rogers defines an adopter category as a classification of individuals within a social system on the basis of innovativeness.  An Early Adopter is more innovative than an Early Majority, for example. 

Below is a summary of representation of Rogers’s five categories.[7] 

Innovators  —  pursue new technology products aggressively. They sometimes seek out these products before the company has launched a formal marketing program.   Technology is a central interest in their life, regardless of what function it is performing. Although they represent less than 3% of all customers, winning them over at the outset of a marketing campaign is essential, because their endorsement reassures the other players in the marketplace that the product does in fact work.

Early Adopters – buy into new product concepts very early in their lifecycle, but, unlike Innovators, they are not technologists – the kind of people who like new technology or inventions for their own sake. Rather, they are people who find it easy to imagine, understand, and appreciate the benefits of a new technology, and to relate these potential benefits to their other concerns. Because they rely on their own intuition and vision, they are key to opening up any high-tech market segment.

Early Majority – share some of the Early Adopter’s ability to relate to technology, but ultimately they are driven by a strong sense of practicality.  They want to see well-established references before investing substantially. Because there are so many people in this segment—roughly one-third of the whole adoption lifecycle—winning their business is essential for the manufacturer to realize any substantial profits and growth.

Late Majority – share all the concerns of the Early Majority, plus one major additional one: Whereas people in the Early Majority are comfortable with their ability to successfully learn and use a technology product, members of the late majority are not.  They wait until a product has become an established standard, and they tend to buy from large, well-established companies. Like the Early Majority, the Late Majority comprises about one-third of the total buying population.

Laggards – simply don’t want anything to do with new technology, for a variety of reasons, some personal and some economic. Companies often dismiss laggards as not worth pursuing.

Moore’s primary innovation to Rogers’s model is in the introduction of gaps – or “three cracks and a chasm,” as he puts it.  The concept of gaps posits that companies do not smoothly sail from one adopter category to the next, effortlessly riding the bell curve to increased market share.  Rather, the differences between the various categories constitute gaps that companies must jump over.  They are not barriers that prevent passage.  However, companies must make a concerted effort to jump from one category to the next.  Moore’s revised technology adoption lifecycle, which includes the cracks and the chasm, is illustrated in Figure 2.

The first crack is a relatively small one between Innovators and Early Adopters.  It occurs when a new technology or innovation cannot be translated into a beneficial product.  Moore offers Esperanto – the international language –  and neural networks – the computer representation of the human brain –  as examples.  Both are technically fascinating, but neither offers any proven usefulness to the buyer.  Esperanto was never widely used, and neural networks have still not provided the promised advances in artificial intelligence.  These products only appeal to Innovators because they tend to love technology for technology’s sake. 

The second crack occurs between the Early Majority and the Late Majority.  Simply put, the Late Majority may not be willing to tolerate or work around product deficiencies and therefore may not buy the product.  Moore uses programmable VCRs and desktop scanners as examples of products that struggled at this stage.  Both were relatively mature products that offered features the Late Majority didn’t necessarily value or care to learn to use.  Devising a strategy to bring utility to this group by investing in the right things – simplification, integration, repackaging, whatever – is vital to a product’s success.

In contrast to these relatively minor gaps, the chasm represents a formidable obstacle to companies looking to leap from the Early Adopter to the Early Majority.  The Early Adopters look to technology and innovative new products as a change agent.  They are willing to be champions in the face of opposition. In short, they are willing to go out on a limb and tolerate product flaws for a jump on the competition. By contrast, the Early Majority are looking for an incremental benefit, an evolutionary approach.  In short, the product needs to be more complete and mature to jump this chasm.

As the title suggests, Moore spends most of his efforts discussing how to cross the chasm from the Early Adopter to the Early Majority.  He outlined a method that follows the steps below.  Moore uses the WWII Allied invasion of Normandy, D-Day, as an analogy.  In his view, crossing the chasm and entering a new market is an act of aggression, often with life or death consequences for the companies mounting the attack.

• Target the attack – you must choose a niche to use as a beachhead. As a startup or new market entrant, you aren’t likely to have the resources necessary to focus on a large market, so it’s better to be more effective in a smaller one.
• Assemble an invasion force – create a “whole product” that provides a solution to the customer’s problems in its entirety. Early Adopters might be happy stitching together different pieces, but early majority users are less likely to want to do so. Moore cites the Palm Pilot as a whole product that provided advanced functionality without too much complexity. Focus  not just on the product, but also on support, training the entire customer experience.  Apple’s iPhone – which is part PDA, part phone, part music player, part computer – vanquished its competition (which themselves vanquished Palm) through a complete customer experience that to some just feels like magic.
• Define the battle by creating positioning to demonstrate that you are the leader in the segment you are attacking.
• Launch the invasion with a direct sales force, which is the best channel for selling high-tech products and for crossing the chasm.

It is essential for marketers who are looking to bring a new product to market to understand the technology adoption lifecycle.  Specifically, they need to make a clear-eyed assessment of each market stage.  If you find yourself on the wrong side of the chasm, then following Moore’s guidance is the best way to cross.  And, if you are not in the high-tech field, you can still benefit from this strategy.  Remember Everett Rogers and his seeds.

Putting It into Practice

What can you do with all of this marketing wisdom?  We certainly don’t recommend running around your organization like a marketing pedant (though occasional table pounding is allowed).  We do recommend that you internalize these lessons and look for opportunities to put them into practice. 

Step back from the minutia of marketing execution from time to time to see the bigger picture.  Take into account customer needs, market dynamics, the relationship of price to your product, and whether customers are ready for what you are building.

With this understanding, think of the levers at your disposal, and ask yourself whether ads and press releases (promotion) are truly your best strategy.   Alternatively, should you focus on something more fundamental about your product or routes to market?  Finally, if your department is restricted to creating direct mail pieces, press releases and advertisements, then ask your CEO why your department is only in charge of one “P” when Drucker, Levitt, McCarthy, Moore, and Rogers knew better.

Learning More

• Peter F. Drucker, The Essential Drucker, New York: Harper Business, 2001.
• Theodore Levitt, “Marketing Myopia,” Harvard Business Review, September-October 1975
• Basic Marketing: A Managerial Approach; William D. Perreault, Stanley J. Shapiro, J. E. McCarthy; Irwin Professional Publishing, 1986
• Crossing the Chasm, Geoffrey More, Harper Business, 1991