‘The theory of maximizing “shareholder value” has done great harm to businesses’

He is 81 and still going strong. His text book on marketing: Marketing Management is now in its thirteenth edition and still remains an essential read for anyone who hopes to get an MBA degree. He’s often called the father of marketing; something he regards as a compliment, while at the same time ceding the title of the “grandfather of marketing” to management thinker Peter Drucker. Meet Philip Kotler, the S.C. Johnson & Son Distinguished Professor of International Marketing at the Northwestern University Kellogg Graduate School of Management in Chicago. He has been hailed by Management Centre Europe as “the world’s foremost expert on the strategic practice of marketing.” In this freewheeling interview he talks to Vivek Kaul.
Historically, the vast majority of marketing campaigns have been designed to appeal to our personal needs, lusts, greed or insecurities. To what extent do marketers exploit our human tendencies toward addiction?
Professional marketers see customers as carrying on both mental and emotional processes as they consider purchasing anything. Marketers need to choose the emotional appeal(s) that are relevant to the particular product or service. For a toothpaste, the appeal might be better breath, whiter teeth, or fewer cavities. Or going further, the appeal might be looking sexier, or having longer term dental health. Each competitor must make a choice. In a campaign to get people to stop smoking, one can use a negative appeal (cancer, lung disease, kidney failure) or a positive appeal (better sports performance, living longer for your family). I have advocated using an anti-smoking appeal showing a father who puts out his cigarette when his child comes into view so as not to pass on this bad habit to his children (this is a love appeal). Human emotions range widely and the choice of an appeal is a careful decision that is conditioned by competitors’ appeals and other data. It might seem to the layman that ads often use sex, power, or ego appeals but we could cite many campaigns that use appeals that are less base.
Lately companies have been cutting their marketing budgets, given the troubled times that we are in. Do you think it is a wise move to cut the marketing budget?
That is a panic response and often inappropriate. If competitors decide to cut their marketing budgets, the remaining firm should consider keeping or even increasing its marketing budget. I would go further and sat that a well-heeled firm might even consider buying out some weaker firms during a recession. In normal times, a company finds it hard to move its market share. In recession times, a well-endowed firm can power up its market share. Much depends on the quality of the firm’s products and services. A market leader should consider adding more value rather than cutting its marketing budget. The leader will probably have to alter its messages and media but it doesn’t follow that it needs to cut its marketing budget.
The economist Milton Friedman famously said: “There is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits”. What are your thoughts on the social responsibility of marketing?
Milton Friedman was my professor at the University of Chicago and we all admired his brilliance. He was a great believer in leaving businesses unencumbered by regulations and he wanted the leave the business owners to decide what they wanted to do with their profits. I took exception to this view.
Why was that?
Businesses are social organizations that can do great good or great harm. We don’t have to be reminded of the environmental damage companies did by dumping waste into water and pollutants into the air. We don’t have to be reminded of Enron and Madoff and other crooks and pyramid builders. We need appropriate regulations for the competitive system to work. I would argue that companies should go beyond their worship of shareholders who often don’t care about the company and jump in and out of owning its stock. The theory of maximizing “shareholder value” has done great harm to businesses. I have argued that smart companies must focus on the other stakeholders first – customers, employees, suppliers and distributor—and make sure that these stakeholders are all rewarded appropriately and that they work together as a winning team. Satisfying the stakeholders is the best way to maximize the long run profitability of the company. I would propose that as education levels rise in a country, more buyers will expect more from companies and base their brand choices partly on which companies have practiced a caring attitude toward the environment and society. Those companies that operate on the triple bottom line — people, planning and profits – will outperform those who only pursue profit.
A major point in your new book Good Works: ! Marketing and Corporate Initiatives that Build a Better World…and the Bottom Line, is that over the last decade there has been tremendous growth in the number of marketing and corporate initiatives that appeal to our desire to help others or tackle social or environmental problems. Why has this sudden change come about? Can you share some examples with us?
Let’s recognise that societies are facing a growing number of difficult problems – world hunger and poverty, local wars, pollution, environment damage, and faulty education and health systems. Solutions are badly needed. Solutions can only come from the three sectors found in any economy: businesses, NGOs, and government. Today, the governments in most countries are in no condition to solve these problems, given their debt levels and their political impasses. The NGOs have as their purpose to help solve these social problems but are even with less funds available in these recessed times. Business is the only agent of change with the means of doing something to improve the sad state of affairs. The public is increasingly interested in which companies are willing to help make a difference in some of these problems. Consider what Wal-Mart is doing now to reduce air pollution. It is not only ordering the most fuel efficient delivery trucks but now asking its suppliers to change to more efficient trucks or else not be accepted as a supplier. Timberland, the maker of shoes and clothing, does a thorough job of waste reduction and of choosing only suppliers who have good environmental practices. The message is that companies have the capacity to be proactive in making the world a better place for all of us.
What do think are the biggest challenges facing marketing today?
Marketing used to be pretty straight forward. Hire able salespeople and brand managers and a top advertising agency and the team will attract many triers and buyers. Marketers didn’t have much input into the product: their job was to get the product sold. Today the picture is radically different. The social media revolution has diminished the power of advertising and requires new skills in the marketing group to successfully use Facebook, You Tube, Linked in, and Twitter. Buyers are now all-knowing thanks to Google and their Facebook friends and they can get excellent information on different brands and their worth. Companies have to make a basic decision: Should the marketing department basically remain a communication group (one P – Promotion), or a 4P group (Product, Price, Place and Promotion)? I am in favor of giving marketing more power to participate in the product development process, and pricing, and place (distribution decisions).
Could you elaborate on that?
I would go further. The ideal marketing department would be headed by someone with the mindset of Steve Jobs. The Chief Marketing Officer (CMO) would be responsible for identifying the best opportunities for the business for the next five years, calibrating the profitability of the different opportunities, and participating with the other senior officers to make the right choices. The marketing group should know more about what is happening in the marketplace and what is likely to happen over the next few years and therefore be in a position to visualise where the business should be going. I remember that some years ago, GE asked its appliance marketing group to anticipate what will be the size and activities in kitchens in the next five years. The marketers came up with a great number of new ideas, many of which GE Appliance implemented. So the basic choice is whether marketing should remain largely a “service” department dishing out communications or it should be a proactive marketing group helping the company identify its best future opportunities. I sometimes say that a company should have two marketing departments: a large one that is busy selling what the company is making , and a smaller marketing group trying to figure out what the company ought to be making the in the coming years.
What is social marketing? Can you share some examples with us?
In July 1971, Professor Gerald Zaltman and I published “Social Marketing: An Approach to Planned Social Change” in the Journal of Marketing. The question was: “could you sell a cause the way we sell soap.” At the time, there was a lot of interest in how we could help people avert unwanted pregnancies, stop smoking, and say no to drugs. We could imagine creating ads that would change certain beliefs and behaviours. We could imagine making new products and services that would provide solutions in these problem areas. We could imagine distribution arrangements that would reduce the accessibility of unsalutory products or increase the availability of better substitute products and services. We could imagine using price to encourage or discourage certain behaviors. All four Ps would work on these social questions as they have worked in the commercial market.
And things have changed since then?
Since that time, social marketing has become another branch of marketing. There are over 2,000 social marketers operating in the world and addressing social causes of poverty and hunger, health, environment, education, littering, literacy and others. Social marketers don’t stop with advertising: they use a planning framework that applies the ideas of segmentation, targeting and positioning and the 4Ps to craft a workable social marketing plan. Dozens of social marketing examples are described in the 4th edition of Social Marketing that Nancy Lee and I published. There is now a hotline where social marketers interested in working on some social problem can put it out to other social marketers to learn of previous work and results in the same problem area. I believe that social marketing methodology has been a major contributor to the decline of smoking, the practice of birth control, the improvement of the environment, the providing of more health facilities and practitioners in poor countries, and rising rates of literacy.
Your basic training is as an economist. How did you move on to marketing?
Marketing is economics, even if many trained economists don’t recognise or read marketing and ignore the one hundred years of marketing writing. As I majored in economics at the University of Chicago (M.A.) and M.I.T. (Ph.D), I was impressed with the high level of theory but disappointed at the neglect of the real actions taking place in the marketplace. Classical economists didn’t say much about several key forces affecting demand such as sales force, advertising, sales promotion, and public relations. Economists focused mainly on price and how it affects demand and supply. They didn’t say much about distribution and the roles played by wholesalers, jobbers, retailers, agents, brokers and other transactional and facilitating forces. In fact, the first marketing books written around 1910 were written primarily by economists who wanted to bring the role of Promotion and Place into the understanding of markets. Even when economists discussed price, they rarely described how price is set separately by manufacturers, wholesalers, and retailers as price setting moves down the value chain.
So how did you move onto teaching marketing?
When I joined the Kellogg School of Management at Northwestern University, I was given a choice to teach either economics (macro or micro) or marketing. I chose marketing because it brought in all these additional forces that affect demand and supply. Earlier I was in a Ford Foundation program with Jerry McCarthy who was writing his textbook on Basic Marketing and proposing a 4P framework: Product, Price, Place, and Promotion. He was influenced by his professor of marketing at Northwestern University, Richard Clewett who taught Product, Price, Promotion and Distribution (which Jerry renamed Place to get the alliteration of 4Ps). Remember that the 4Ps are demand-shaping forces and should be part of basic economic theory. The interesting development today is that classical economics is undergoing the challenge of a different school of thought, namely behavioural economics. Behavioral economics drops the assumption that producers, middlemen and consumers always make rational decisions. At best there is “bounded rationality” and “satisficing” behavior rather than rational profit maximization. What is most interesting is that “behavioural economics” is just another name for “marketing” and what marketing has been researching for 100 years.
How do you manage to write about marketing from almost every angle?
I recognised early that marketing is a pervasive human activity that goes beyond just trying to sell goods and sales. What is courtship, after all, if not a marketing exercise? What is fundraising, if not a marketing exercise? What about building a stronger brand for your city, if not a marketing exercise? Every celebrity and many professionals are engaged in building and marketing their brand. This led me to want to bridge marketing theory and practice to other things than goods and services. I started to research and write on place marketing, person marketing, cultural areas marketing (museums and performing arts), cause marketing (i.e., social marketing), religious institution marketing, and so on.
(The interview originally appeared in the Daily News and Analysis on August 27,2012. http://www.dnaindia.com/analysis/interview_theory-of-maximising-shareholder-value-has-done-great-harm-to-businesses_1733089))
(Interviewer Kaul is a writer and can be reached at [email protected])