The Structure of Marketing Revolutions

(with apologies to Thomas Kuhn)

The term 'paradigm shift' was first coined by Thomas Kuhn in his 1962 book, The Structure of Scientific Revolutions'. The basic gist of his argument is that areas of knowledge are based on particular paradigms, or ways of understanding the world.  They are a set of assumptions which effectively render certain things  'unthinkable'.  Paradigms change when they basically can't accomodate new data or observation and so collapse, to be replaced by another one.  If you want more, our old chums Wikipedia will give you a good start.

Predictably, as a business we're pretty fond of 'paradigm shifts'.  So there's a paradigm shift every couple of months.  The latest one I've come across is The Paradigm Shift from Clicks to Conversions'. 

Oh dear.

It is possible though that a genuine paradigm shift could be around the corner.  And for once it's not marketing hyperbole.  This could be the real thing.  Let me explain.

Before we start talking about 'shifts' we need to understand where we're at today. What are today's assumptions about the role of business?

Simple.  The role of a business is to enrich its shareholders.  This has been the dominant business paradigm since it was first articulated by Jack Welch in the mid 70s (though he's recently distanced himself from the idea).  This paradigm helps to explain a great many things that we as agencies habitually gripe about.  It explains why the route to the top of client companies is no longer via marketing, but via finance.  It explains why the most popular book on marketing - Peter Doyle's Value Based Marketing - has become such a revered text - because it links marketing with, you guessed it, shareholder value.  And it explains why metrics like net promoter score, and the utterly hideous 'customer delight', though causing much excitement in markteing departments and agencies, have failed to take hold at most client organisations.  Because most client organisations do not believe they are in the business of 'delighting customers', they are in the business of delighting shareholders.  If these two things occasionally align, that's fortuitous, but, given the choice, shareholders win - the marketing people can look after customer delight if they have to, but the grown ups are focussed on shareholders.

That said, this paradigm has started to creak a little.  In the wake of the collpase of Enron - the 'smartest guys in the room', and poster boys for the shareholder value movement - MBA courses the world over upped the ante on buisness ethics, but the paradigm was against them. 

A story about Jeff Skilling, Enron's president, recounted by one of his classmates at Harvard, John Leboutillier, illustrates this beautifully.  In a lecture he was presented with this scenario - 'You are the CEO of a major pharmaceutical company.  You find out one of your best selling products has dangerous potential side effcts. What do you do?' 

His reponse - 'Nothing.  My duty is to maximise returns to my shareholders.  So I keep selling it.'  Ethically, it's a repugnant position, but within the paradigm of shareholder value, it's logic is pretty faultless.

But still the disquiet contiuned to grow.  The new focus on buisness ethics gave rise to the CSR movement of the early part of this decade.  Inevitably, this new notion was explained as part of the dominant pradigm - that CSR was a route to greater shareholder value - and much mental gymnastics went into explaining this (try here or here).  But, of course, there was now a fundamental philosophical problem.  CSR is based on the notion that organisations have a responsibility to society as a whole, not just to shareholders.  So what happens when these two positions clash?  Who wins?  The answer was still the shareholders.

Fast forward to 2008.  The collaspe of the global banking system is narrowly averted, but there are high profile casualties and the global economy tips into a deep recession.  Now murmurs about the inadequacy of the shareholder value paradigm become a more widespread and fundamental assault.  Shareholder value encourages crazy short-termism, as companies fluff up their quarterly figures, paying little or no attention to the longer term fundamentals of the business, or, in extreme cases, simply lying about the health of their companies via arcane accounting trickery (check out repo 105).

2008 also sees the publication of The Brand Bubble, a fascinating analysis of Y&R's Brand Asset Valuator data going back some 20 years.  The authors, John Gerzema & Ed Lebar, reach some frankly disturbing conclusions.  Most significantly is the huge, and growing, mismatch between consumer perception of brands and shareholder perceptions of brands.

Brands have become hugely important to shareholders.  According to Joanna Seldon, of Millward Brown Optimor, quoted in the book, "Today brands account for approximately 30% of the market capitalisation of the S&P 500".  As Gerzema & Lebar point out, this is a huge increase - in the late 70's, brands only represented about 5% of the market cap of the S&P 500. 

But the really worrying thing is this.  Just as shareholders have come to value brands more and more, consumers are valuing them less and less.  Analysis of the BAV data showed that brands are trusted less, less liked and respected, less salient and are considered of lower quality than at any time in history.  And brands are there to command loyalty and a price premium from consumers.  If consumers no longer believe in them, then they have no value at all, regardless of what shareholders appear to believe.

But in this analysis, we start to see the way forward. And, finally, instead of just attacking the shareholder value movement, we are starting to see what could replace it.

In a fascinating article in the HBR last month, Roger Martin, argued a strong, tightly defined case that shareholder-value needs to be replaced with what he calls 'Consumer Capitalism'.  This approach would place the primary responsibility of the firm as being to its customers, not its shareholders - and that this is what drives successful companies, rather than a relentless focus on short term results.

The evidence he marshals in support of his case is compelling, but perhaps most damningly of all he shows that shareholder value has been a failure on its own terms.  From 1933 to 1976, pre-shareholder value, shareholders of the S&P 500 earned compound annual real returns of 7.6%.  From 1977-2008, this figure dropped to 5.9% a year.  The shareholder value movement, it appears, does not enrich shareholders. 

In contrast he looks at P&G and J&J, both companies who focus on customers first and looks at how their performance compares very favourably with the numbers just quoted. 

All this of course does not mean that share price stops being important, of course it's still important, but, Martin argues, the best way to drive it is to focus on consumers expectations.  Share price gains will follow.

I urge you all to read the article here (subscription needed - if you work at OMD, come and see me), because, if this does take root, it has significant implications for us, and our clients.

First it will restore marketing people, as the customers representative within an organisation, to the very heart of what business does, instead of just playing on the periphery.  And second, it is agencies who advise companies on customer behaviour.  Knowledge that will be the difference between success and failure if the shareholder value model is replaced by the idea of consumer capitalism.

Let's hope.

-- Toby

Comments

[OlGrrr]

Great read, great point!

[Sam d'Amato]

Interesting stuff Toby. I wrote a post recently on 'why brands struggle with social media' that touched on some of the points in your post and the HBR article. Essential I think it is because of the shareholder focus and the fact they are unable to act like people in that space.

Speak soon, Sam