Marketing Strategies for the new economy- -

By Lars Tvede and Peter Ohnemus - ’01--Book Review by: Chetan Parikh
 

The authors- Lars Tvede and Peter Ohnemus- review the history of marketing - 'The Commodity School' which emerged around 1910 and gained broad acceptance just after the Second World War. " The Functional School", which classified the different tasks involved in the marketing practice, '"The Regional School" which developed after 1913 and dealt with distribution issues - how to bridge the gap between buyers and sellers, ' The Institutional School' which focused on the organisational implications of marketing - how to organise a company internally, and how to co-operate with other companies to reach success and ' The Buyer Behaviour School', which focused on the reasons why people would buy certain products and services.

As the authors state : "Most of the mainstream knowledge gained from these six marketing schools is still true and relevant for the theory and praxis of marketing, whether it is within the 'old' or 'new' economies. Most of it will, in fact, probably be relevant for as long as business exists. But there are phenomena in the economy that these schools don't cover because the phenomena didn't exist or weren't important when the schools emerged. These new phenomena arise when companies, people and computers are tied together in huge digital networks where time, place and legacy investments matter less and less. None of the previous marketing schools had assumed the effects of millions of computers, billions of small chips, armadas of communication satellites --and the Internet. But while the traditional marketing schools did not describe the new networking phenomena, there have subsequently been numerous attempts to encapsulate many of the changes, that have occurred. Enormous amounts of literature have already been written about the effects of digital networking, and anyone who reads some of it will soon see that it describes things that are truly new and different. It is beginning to look like a new school of marketing.

We could call this new school many things, but the best term is perhaps the 'Digital School'. Networking has always been a part of marketing, so this term doesn't encapsulate the school. It's the digital aspect that is new. Digital communication is responsible for a cluster of new phenomena that are so strong and different that we think they deserve their own school.

This Digital School of Marketing has received contributions from numerous great thinkers. We shall meet many of them as we proceed further in the book, but it seems fair to list a few right here:

• George Glider wrote widely on numerous phenomena in the digital economy, and originated 'Gliders Law', which states that the total bandwidth of telecommunications triples every 12 months.
• James Moore coined the term 'business ecosystems'.
• Robert Metcalf was the originator of 'Metcalf's Law', which stipulated that the value of a network grows in exponential proportion to the number of people connected.
• Gordon Moore was the originator of 'Moore's Law', which suggested that chip's processing powers would continue to grow exponentially for a sustained period of time.
• Peter Drucker argued that in the new economy, the key means of production was no longer capital equipment but human intellect. This shifted the power from corporations to individuals. Drucker was also one of the first to describe how new technologies in the digital economy typically have to be at least 10 times better than what they replace in order to succeed.
• Brian Arthur published a series of influential articles about network effects, increasing returns, feedback processes and path dependency. 'Brian Arthur's Law' states that companies operating in the network economy often experience increasing marginal returns.
• Stan Davis and Bill Davidson were among the first to describe the concept of a market segment of one.
• Geoffrey Moore provided the best description of the critical development phases in a digital economy and coined the now widely used economic expression and 'crossing the chasm', 'gorilla game' and 'tornado'.
• Alvin Toffler coined the term 'prosumer' to describe the consumer who contributes to the production process through collaboration with the supplier.
• Mark Weiser was first to write about 'ubiquitous computing'.
• Paul Romer developed a number of simple theories and models that described the digital economy in academic terms.
• Paul Krugman made numerous observations of the digital economy, and stressed that supply and demand curves often had the opposite slopes in the new economy compared with the old economy.
• Paul Saffo suggested that we talk about the 'value web' instead of the 'value chain', since value flows both ways in the digital economy. Saffo also coined the term 'disinterremediation' to describe the fact that networking changes intermediation rather then eliminating it.
• Alvert Bressand coined the term 'R-Tech' for technology that facilitates relationship management (creating tailored products, recalling preferences, anticipating interests).
• John Hagel suggested that technology should not only help customers generate information about users, but also help users generate information about themselves and about economies.
• James Gleich wrote the book Faster: the acceleration of just about everything, in which he described how business( and other things) are accelerating frantically".

The author writes about the shift from networked computing to ubiquitous computing- "Ubiquity is provided not only because data can flow over many different networks. It is also because it can flow to many different devices. To PCs, of course, but also to television sets, mobile phones, personal digital organizers, car entertainment systems, and even to refrigerators with plasma screens. And to numerous devices equipped with jellybeans. There will soon be hundreds of categories of devices that connect electronically.

One of the key solutions will be a technology called 'Bluetooth'."

Saffo wrote in a 1999 article:

"Barely five years ago, the notion of commerce over the Internet was anathema. Later, Internet commerce became the hottest thing in cyberspace. Once Net commerce became real, conventional wisdom held that the Internet would spell the death if advertising.

In fact, the Internet out to be a huge new advertising frontier.

Now, a much more dangerous bit of conventional wisdom is on the loose. It is the notion that information technologies will bring about disintermediation - that is, networks and information systems will allow buyer and seller to interact directly, there by eliminating intermediaries and radically shortening value chains.

There's only one problem with this theory. It's directly at odds with what is actually happening. Rather than eliminate intermediaries, information systems do quite the opposite. Information systems are powerful commercial tools because they lower transaction costs. Lower transaction costs enable new kinds of transaction, which lead to new market niches and, overall, make the market environment more complex. In short, information systems create openings for new intermediaries to discover and occupy.

Meanwhile, old intermediaries are disappearing, but that is only part of the picture. What seems to be disintermediation is really a mirage, one static piece of a larger process in which the introduction of new information systems disturbs market environments, creating slots of new intermediaries whose presence threatens older established intermediaries who either disappear or adapt to new market realities. What looks like disintermediation is but one frame of a larger dynamic of 'Disinteremediation'."

Other than inventing one of the most complicated words in marketing ('disinter-remediation'), Saffo managed with this article to encapsulate a key development in the markets: while the new mediators don't have to operate retail shops, there are a number of tasks that they actually do fulfil. So, we could perhaps even try to extract yet another rule. (Saffo's Law', of course) from his writings: The diversity of distribution services is reversibly proportional to the cost of distribution transaction.

Digital communication technology reduces the cost of distribution, therefore we see that the distribution intermediaries in digital economies (the sectors that many thought would disappear) are alive and multiplying in numbers and diversity, as they provide the following:

• Product comparisons and ratings
• adjust prices to market conditions
• search and filtering facilities
• new product alerts
• access to product-related discussion forums and chat sessions
• recommendations based on users' search and purchase habits
• electronic payment services
• shipping services
• electronic product presentations
• product-related information, such as news, regulatory data, research, reviews, awards etc.
• information about the buyers' previous purchases, wish lists shopping baskets, etc.
• digital exchanges linking and buyer to any seller within product categories
• real-time data for advertisers

they will also, in most cases, have to maintain a physical inventory of goods, and they will need real people for customer support. Lots of them, in fact. Experiences. From electronic stock market trading service indicate, for instance, that you need a customer support person for every 50 active customers.

So, the real change is not disintermediation but a vast improvement of the services that intermediators provide to their customers. More and more goods will be traded in ways that are reminiscent of electronic stock markets. Customers will have full transparency, prices will change more frequently, and transactions will be possible from anywhere."

The authors have identified four key sources of market inefficiencies that dominate the digital economy:

• Network effects. The ability to increase the value of a product or service as more and more people use it.
• Minimal marginal costs. The tendency for marginal costs to approach zero in digital economies.
• Path dependency. The tendency for first movers to establish leads that are virtually impossible for late starters to catch up on.
• Leverage. The ability to mobilize company- external resources that far exceed the company's own resources.

They also identify five major value models.