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Alternate routes to global marketing.

A working sketch of the consumer markets in Germany, Japan, and the United States

Beneath a veneer of converging consumer tastes in the United States, Japan, and Germany lie three strikingly different "systems" -- complex sets of relationships and practices among manufacturers, retailers, distributors, and advertising media -- by which those tastes are modified, measured, and met. Deeply entrenched in the three national cultures and the companies that have grown up in those cultures, these idiosyncratic systems, some of which date back to the late 1940s or before, do more than determine how consumer business is done in each country. They also determine what it is possible for consumers to buy, where they will buy it, and how much they will pay. They not only mirror what people desire. In quite different ways, they create that desire and then satisfy it.

DESPITE THEIR SUCCESS in creating high standards of living, the consumer systems of Germany, Japan, and the United States are remarkably different. Just consider:

In Germany, as in many other Northern European countries, a few giant retailers hold most of the power and capture most of the surplus generated by the system. In food, for example, the top five German retailers control more than 40 percent of the market -- twice the level of concentration in the United States and eight times that of Japan. So great is their power that these retailers have grown somewhat complacent, with little drive to become more efficient or more innovative or to take chances on new products. This reluctance stifles innovation by manufacturers, which in turn limits the choices available to consumers.

Quality is high, but variety low. American nonalcoholic beverage companies introduced 27 times more new products in 1991 than did their German counterparts. On average, German supermarkets stock just about one-fifth the variety of products that Japanese supermarkets do. The German consumer market is affluent, but it is an austere kind of affluence.

In Japan, distribution and retail channels are highly fragmented and extremely inefficient. The United States has 145,000 food stores to serve a nation of 250 million; Japan, more than 620,000 to serve a population one-half the size. The country's byzantine system works only because the Japanese do an extraordinary job managing relationships with channels and managing key functions like new product development and logistics.

As a result, Japanese consumers can choose from a much larger variety of products than do consumers in other cultures, but they pay for their system's lack of efficiency with considerably higher prices. It costs US and German retailers about $25 to deliver a market basket of groceries to a consumer, but in Japan the cost to retailers is about $35. This means the average Japanese must work 40 percent longer than his or her German or American counterpart to buy a weekly supply of groceries.

In the United States, the consumer system has very low barriers to entry, and its structure is extremely competitive and dynamic. Because mass markets in the United States -- and, to some extent, in the United Kingdom -- are no longer growing, manufacturers and retailers are constantly segmenting markets in a quest to find and serve high-profit niches. Such an intense flurry of competition and segmentation has created an ever-widening set of options for consumers, both in terms of the products they can buy and the types of stores in which they can buy them. In the food business, the US system delivered just shy of $1,500 in value, adjusted for currency differences and purchasing power, to each US citizen in 1990 -- nearly twice what either the Japanese or the German systems were able to deliver.

Important as these system-to-system differences are in the present, their most lasting effect will be the ways in which they help or hinder the efforts of national companies to adjust to the realities of increasingly global consumer markets. What we have seen to date suggests that each, in its own fashion, has created a heritage -- a system "culture" -- that retards or distorts such adjustment.

Intense competition in the United States has bred a dangerous short-term mentality, in which a constant drive to segment markets has left organizations awash with information but shipwrecked by runaway marketing spending for ads, promotions, and sponsorships. The quirky inefficiencies of the Japanese system make most of their consumer-related skills, save for rapid product development and lean manufacturing, irrelevant outside Japan. The sheer static power of German retailers has bred a generation of consumer companies that are slow to innovate and slow to develop new products, a severe handicap in the emerging global marketplace.

To better understand the challenges faced by current or would-be global marketers based in these systems, we need a good working sketch of each -- its strengths, its weaknesses, its balance of power among key players. This is what we attempt to provide here. Our goal is not to paint a definitive picture of each system. It is far more modest: an impressionistic and, where possible, provocative description based on our experiences in our own leg of the Triad -- Parsons in the United States, Ohbora in Japan, and Riesenbeck in Germany. We intend -- and expect -- to settle nothing. Instead what we want and hope to do is to get the discussion going and to get it headed in the right direction.

To that end, we look in turn at three critical aspects of each system. The first two, channels and functional skills, relate to the structure of the industry as a whole. The third, organization, relates to the structure of individual companies. Throughout, we will be trying to answer three questions: What is the system really like? What are its hidden tensions and challenges? And where can useful approaches or precedents be found in the other two systems?

Channels

As noted above, the German market, like many other European markets, is dominated by a small number of large and powerful retailers. These big retailers -- Aldi, REWE, and Tengelmann, among them -- have far more say in selecting and promoting brands and far more latitude to push their own brands than even their most powerful American or Japanese counterparts. At the extreme, some -- like pan-European discounter Aldi or like Marks & Spencer and Sainsbury's in the United Kingdom -- are considered virtual "brands" in themselves.

Retail power

This concentration of power is not good for consumers. Because these giant retailers are the only pathway between manufacturers and consumers and because it is least risky and most profitable for them to sell established products with proven commercial appeal, they use their power, in effect, to squelch new products. In Germany, for example, if a manufacturer has a new product to offer and does not get a listing with Tengelmann, which effectively controls 20 to 30 percent of the market in most food categories, or gets a listing under onerous terms and conditions, that new product is guaranteed to fail.

Only very few brands -- Mars, for example, or Nivea or Ferrero confectionery or Coke -- have the appeal to overcome this power. With no equivalent of the protection offered in the United States by the Robinson and Patman Act, which requires manufacturers to sell under equal circumstances to each retailer, innovators suffer and consumers pay the (albeit invisible) price of lost choice.

Experience shows that, in Germany, successful innovations and new products come mainly from large players with great financial power. Only giants like Philip Morris, Unilever, and P&G can afford the huge advertising and promotion budgets necessary to push new products through the system. But even these behemoths have to bow to the power of the large retailers.

Procter & Gamble learned this lesson the hard way in Europe in the 1970s. It advertised heavily and created consumer pull, but paid little attention to retailers, assuming that they would fall in line behind consumers. The retailers responded by rejecting many of P&G's product lines and kept up the squeeze until P&G began to work more actively with them. Today, P&G actually surpasses many traditional European companies in its degree of collaboration with retailers.

Resistance to change

The defects of this system will prove more troublesome as German companies look to expand into new markets where they will have to compete with non-German companies. Although German retailers compete aggressively with each other on price, there is little or no competitive intensity in any other aspect of their business. The government somewhat fosters this lack of competition by restricting where new hypermarkets can be built and the hours that all stores can be open. By contrast, intense competition between retailers in the United States forces retailers there to rationalize operations, cut costs, redesign processes, and innovate with new formats, better service, longer hours, and lower prices. Protected and powerful, their German counterparts face few such pressures to maximize efficiency or increase the value delivered to customers.

This kind of static system is poor preparation for a far more dynamic global system, in which new channels and new formats, like Home Depot or The Limited are coming into the market all the time. In the face of such new possibilities, its tendency is to stonewall. Early on, for example, Toys 'R' Us had great difficulty in getting access to the best-selling toys and children's products in Germany because other retailers prevented manufacturers from using this new channel. In fact, when teddy-bear maker Steiff signed up with Toys 'R' Us soon after it entered the German market, its products were blackballed by virtually every other toy store in the country.

Product churning

The Japanese system rests, in large part, on the dynamic that drives its consumer products companies perpetually to create and introduce new products. This "product churning" reflects, of course, the Japanese consumer's well-known passion for new products.(*) It also reflects, among manufacturers, the speed-to-market in new product development, in which the Japanese completely outclass their American or German rivals.

In the soft drinks industry, for example, more than 700 new products and brands are marketed each year, but about 90 percent of them disappear after only one year in the market. This is a common pattern. Ajinomoto, the largest packaged foods company in Japan, launched between 20 and 35 new frozen food brands each year between 1986 and 1989. Only about half survived for one year, and most have gone entirely from today's market. Such product churning activity is not limited only to packaged goods, but applies as well to consumer electronics. Sony launched 182 new products in 1990, almost one new product per business day.

True, Japanese companies are, on average, much better at flexible mass production than Western companies. Nevertheless, the constant flow of new products places extraordinary demands on the other elements of their consumer systems. Japanese supermarkets, for example, are about one-third the size of American supermarkets, yet the number of SKUs is much greater than in a US supermarket: 30,000, as compared with 20,000. Space in Japanese stores is so tight, there is little or no room for stocking inventory. What is on the shelf, often just a few boxes of a product, is what is in the store.

Consequently, manufacturers and the multilayered system of wholesalers that stands between manufacturers and retailers, must invest heavily in logistics. Given the thin inventories carried by the retailers, it is not uncommon for manufacturers or their wholesalers to make two delivery runs per day to a store. Remarkable from a logistics point of view, this is a very expensive and inefficient way to do business. It also takes an environmental toll: clogged roadways, excess fuel consumption, and fouled air. As indicated earlier, Japanese consumers pay for this inefficiency through prices 40 percent greater than those in the United States and 35 percent greater than those in Germany.

Channel relationships

In the United States and Germany, marketing means selling to consumers. But for many Japanese companies, it means developing and nurturing long-term relationships with the channels -- relationships that are far more intimate than those formed in either Germany or the United States. This is called "Eigyou" in Japanese. The Eigyou mentality works in Japan because channels -- both wholesale and retail -- are small and fragmented. Shiseido, the largest cosmetics company in Japan, has over 25,000 retailers; Matsushita (Panasonic), roughly 18,000.

As in Germany, much of the system's structure can be traced to government regulation. In Japan, small stores and their wholesalers are legally protected. Because you need a license to sell liquor at the wholesale or retail level, the government can protect mom-and-pop businesses by limiting the number of licenses it issues to large chain stores. This is also true for selling rice and, to some extent, over-the-counter drugs. In addition, there are regulations, slowly being relaxed, that restrict where retailers can open large-scale stores. Any store with more than 500 square meters must get approval not only from the government, but also from the local community.

The ability to get close to suppliers and retailers is a skill that will ultimately serve Japanese companies well as they enter global markets. Even so, there are deep problems with the Eigyou mentality. It places too much value on relationships with channels and suppliers and too little value on relationships with consumers.

As with product churning, it creates very high fixed costs for manufacturers, which must invest heavily -- in information-based networks, financial support, and extensive salesforces -- to lock in these channels. And as with product churning, these high levels of investment lead to higher costs for consumers. More crucially, Eigyou works only in the highly-fragmented and static markets of Japan. It is of little use in global markets.

Dynamism

Nothing happens slowly in the US consumer system, where fierce and roiling competition means that channels must remain extremely fluid. Grocery stores compete against drugstores and warehouse clubs, as well as against other grocery stores. The whole system is very open. There are few barriers to entry and little concentration of power.

This dynamism in the channels means that terrific value gets delivered to the consumer, both in product variety and price. There is a product and channel combination for every market segment. Manufacturers are pushed to be innovative because retailers are always looking for new, attractive items to sell. They are not so concerned about strong brand franchises or traditional relationships with manufacturers. Their focus is on the consumer. Unknown products like Cabbage Patch dolls, Mutant Ninja Turtles, or Swatch watches can go from obscurity to ubiquity virtually overnight.

New formats regularly emerge and take major share away from established players, as The Gap, Pier 1, and Lands' End, the mail-order house, have done from the big department stores like Bloomingdales and Macy's. During the past decade, alternative formats like warehouse clubs, mass merchants, and deep discount drugstores have captured around 6 percent of total grocery-related business and over 20 percent of the health and beauty aid category.

All told, this extreme dynamism in the channels puts considerable financial pressure on retailers committed to tradition-bound formats. These pressures come not only from competition within the channel, but also from manufacturers looking for special deals, promotions, and the like.

Balance of power

If a US manufacturer has a viable value proposition for the consumer, it will find its way to the store shelves. Products even from tiny start-up companies, like $2.5 million sales Guiltless Gourmet, which makes low-fat tortilla chips, can find their way on to the shelves of some of the largest retail chains right next to products from giants like Frito-Lay. The United States has, of course, some enormously powerful retailers -- Wal-Mart and Home Depot, for example -- but even these companies do not so dominate any market that a manufacturer would have to throw in the sponge if it could not get them to distribute its products.

As in Germany, there is a power struggle in the United States between manufacturers and retailers, who wrestle over terms and conditions all the time. Unlike the German system, however, the two are more equally matched. There is no sense, as there is in Japan and Europe, that an unnatural imbalance exists in the system. It is more finely poised. And it shifts all the time.

During the 1970s, surveys with retailers in the United States showed that P&G did very well in terms of brand pull and professionalism, but very poorly on "Do you like to do business with them?" During the early 1980s, P&G made an enormous effort to change its trade relationships by shifting to direct product profitability, redesigning all its packages, and exploring new modes of partnership with the trade that culminated in the integrated inventory system established with Wal-Mart. Today, however, P&G has started to reduce trade promotional spending as it moves to "everyday low pricing" -- a move strongly opposed by some of the big retailers, whose profitability depends on the old form of pricing with its wide price swings and constant special promotions. The outcome of this battle is still an open question.

Functional skills

As with channels, the functional skills of the US system -- media, advertising, market research -- are intensely competitive and dynamic. Individual media try to get the highest rate possible for their ability to communicate to consumers. Manufacturers try to choose intelligently from the increasingly fragmented selection of available media: cable, specialty magazines, newspapers, outdoor and in-store advertising, radio, direct marketing, and event sponsorships.

Fragmentation and clutter

Again, as with channels, the media are evolving toward the precise delivery of specific value propositions to highly-targeted consumer groups. Although there will always be some role for mass media, the clear losers are old-fashioned mass media like television networks and the big news magazines. The world is fragmenting.

Single cable television channels are splitting into more targeted sub-channels. Magazine publishers like Newsweek and Time are creating special regional and sub-regional editions, where advertisers can design ads to go only into particular issues in particular parts of the circulation list. Sophisticated market research companies like Nielsen and IRI and advanced direct marketing techniques allow both manufacturers and retailers to pinpoint their customers ever more precisely.

This trend toward fragmentation and customization holds true for all media, and it is not purely good news. It is very expensive. Between 1985 and 1990, the sales of US food companies grew at 3 percent per year, but advertising spending grew at 10 percent. The picture in the automobile industry, which accounts for just under 15 percent of all US ad spending, is even worse. The industry grew at a paltry 2 percent; its ad expenses, at 14 percent.

One result of these developments has been tremendous advertising clutter. The average American consumer now receives several hundred advertising exposures a day. Because there is a practical limit to the rate of absorption, the productivity of each advertising dollar has declined. This has led, in turn, to a much closer scrutiny of advertising and marketing spending and to a much more disciplined effort to measure how each dollar spent affects sales and profits. It is not a pretty picture.

Advertising under scrutiny

Clutter has demonstrably lowered the real returns on advertising. Since 1970, the average cost of a network prime-time spot has risen roughly fourfold. At the same time, the average ratings for top shows have plummeted 20 percent, and viewer recall of commercials has fallen 12 percent. That means, during the 1980s, advertisers had to increase spending at nearly twice the rate of inflation to maintain a given level of audience impact.

Armed with reams of sales data from supermarket and chain-store scanners, packaged-goods companies and other large advertisers have grown painfully aware of this inefficiency. Of late, there has been a radical reappraisal of the level of advertising support for many of the best-known brands in the United States. In 1991, for the first year since World War II, there was an actual decline in US advertising expenditures. 1992 will continue to be very weak, not just because of the recession. Advertisers are demanding better performance from the media and from their advertising agencies. The trend will continue.

The golden era

The United States and, to some extent, the United Kingdom went through a kind of golden era of brand advertising in the 1960s, the 1970s, and even the early 1980s. Advertising budgets grew. So did advertising agencies. Both now find themselves in a period of contraction and stabilization. More of total advertising spending is going to new types of consumer products, entertainment products, and consumer services, instead of to traditional grocery products or over-the-counter drug products.

By contrast, most of Europe, Germany in particular, is still in the heyday of media and packaged-goods advertising. Budgets still are increasing, driven in part by liberalization of the media, especially television. It is pretty early to start looking closely at the efficiency of advertising. European manufacturers do look at effectiveness of advertising, but that is more to determine where to spend their media budgets than to cut back on how much they spend.

The United Kingdom was the first to privatize channels like ITV, followed by France, Italy, and now Germany. Before privatization, there was a very restricted supply of television time available, and it was priced at an artificially high level. After privatization, the supply of television increased, prices dropped, and private television took a great deal of market share from magazines, government-owned television, and radio. The few pan-European channels, like MTV and Eurosport, have favored international, standardized advertising for brands like Coke, Gillette, Visa, and Mars candy. Although television is now the dominant advertising vehicle, media budgets in general are still growing fast enough that not a great deal of competition has sprung up among the media.

Convergence?

In Germany, just three years ago, you could see only three television channels -- all state-owned. Now, there are more than 20 channels on cable, 15 of which are privately owned. Today, cable is available in more than three-quarters of all households in Germany. So, for the first time, German manufacturers have a full palette of media to choose from. In other European countries, the situation is similar. But the mass-marketing approach they are following is quite unlike the kind of media-based segmentation that now dominates in the United States.

There are other, structural differences working against a US-style trend in Germany and elsewhere in Europe. Sophisticated market research and test marketing are as widely used as in the United States. But the power of retailers and their historic resistance to new products mean that, even if an advertiser could create demand for niche products, it is not clear those products would ever find broad enough distribution through large retailers to earn a profit. Moreover, laws that bar commercials from mentioning competitive products reenforce the European system's strong resistance to the new, targeted products that drive the segmentation trend in the United States. It is very difficult for new products to compete against existing ones if they are not able to make direct comparisons in ads. Even Pepsi's competitive ads against Coke have never been allowed in Germany.

Europe also offers problems of scale. In the United States, a magazine or cable channel targeted to outdoor sportsmen has a country of 250,000 million people from which to draw its audience. Because there are 12 separate EC countries, each with its own language and culture, the economies of scale available in any given targeted market are much lower than in the United States. Indeed, for many advertising campaigns, it is necessary to use country-specific casting and language. The few pan-European channels communicate only in English and reach only a limited group of viewers. For the foreseeable future, pan-European advertising will remain the exception, not the rule.

Advertising in Japan

As in Germany, Japanese television and radio are basically nationwide networks and, thus, reach an audience quite unlike the highly-segmented US market. In fact, it is less segmented than even the European markets. With the exception of NHK television, all television and radio has been privatized, and the government has been encouraging the addition of new local television channels, new FM stations, and new media such as cable television and satellite broadcasting.

Although Japan has no formal legal restrictions on directly comparative advertising, as Germany does, the media abide by an unspoken rule not to allow it. Furthermore, Japanese ad agencies believe that Japanese consumers are not persuaded by comparative ads. Recently, however, Pepsi-Cola and Philip Morris have broken this taboo, using Dentsu, the nation's largest and most powerful agency. So far, no Japanese company has followed suit.

The Eigyou mentality has its effects on advertising as well. Although the big consumer manufacturers advertise heavily on Japanese television, their ads are aimed at creating support and interest both from the channels and from consumers themselves. Manufacturers traditionally rely on their salesforces for promotional campaigns designed to push their products on to the store shelves. Now, when they do these promotional campaigns, they also do television advertising so that the channels can see that the manufacturer is really behind the promotion.

Market research

The most striking difference between Japan and the West in these areas is the role of market research. American and, to some extent, German companies do extensive research and test marketing before launching new consumer products. At a large US company like Coke or Colgate, it would be unthinkable to launch even a modest product improvement without first thoroughly testing it on consumers. In Japan, top management focuses on sales channels and production technology, not on traditional product market strategy. Rapid product launches are more important for them than understanding the people to whom the new products might actually appeal.

Test marketing, a mainstay of the US system, is quite limited in Japan because product churning is commonly used as a sort of "real" test marketing tool. The infrastructure is also not suited to it. Television and radio are nationwide media; they do not lend themselves to reaching well-defined areas for test marketing purposes. In addition, test marketing is often seen as a very risky activity because competitors might very quickly see what you are doing and launch counterproducts directly into the market. The three to six months that such tests often take in the United States are long enough for Japanese competitors to create and launch rival products.

This does not mean, however, that Japanese companies do not collect information about the market or draw up sales plans.

Their sales plans flow from their Eigyou mentality and are based on the salesforce's assessment of how much they can sell to which channel. As a result, Japanese companies are actually very quick and flexible in adjusting to market changes, particularly to the moves of their competitors. The problem is that the overall market positioning of their products is often unclear; sometimes nonexistent.

Point-of-sale data

Japanese companies get most of their consumer information through salespeople and channels. This is one of the reasons why they always want to maintain a very good, exclusive relationship with retailers and wholesalers. Unlike some of the chain stores in the United States, Japanese chain stores never disclose to outsiders the sales information gathered through their point-of-sale (POS) scanners. They guard this information jealously and disclose it only to manufacturers that have a close, Eigyou relationship with them.

The big chains also use POS information to make their operations more efficient. In addition to "newness," Japanese consumers also put an extremely high value on freshness. Stores have to stock the very freshest foods and juices. Even beer has to be fresh. Hence, many chain stores use POS information to watch sales turnover and facilitate just-in-time delivery.

Japanese POS technology also enables buyers to do very precise evaluations of sales volume, product by product. This gives them strong negotiating power vis-a-vis salespeople from the manufacturer. As a result, many of the Japanese chain stores are more efficient in this respect than their counterparts in the West. Their approach, however, is very mechanical and this "mechanicalness" often limits their merchandising skill.

Many, in fact, rely on POS data to screen products. When new products are introduced by the manufacturer, rather than using their own judgment about what consumers might want, they tend to favor the new products already on the shelf and wait to see what the POS data tell them over the next three to six months. This only makes the shelf space competition for new products worse and intensifies product churning.

Market coupling

Some Japanese companies go further. Although they do not use traditional market research techniques, they are very creative in getting information about what consumers want by using what we call "close market coupling." Kao, for example, has its own cadre of consumers, who are available to any people in the organization for panel discussions or focus groups. Even R&D frequently uses these consumer panels to screen its R&D themes and development activities.

Nintendo is another interesting example. Its product development is done by independent contractors, who are really nothing more than young computer aficionados who live for computer games. Nintendo finances a number of these computer whizz kids and encourages them to come up with game software that they find interesting. In other words, Nintendo is actually asking its most sophisticated customers to create its new products.

Organization

For German as well as many other European consumer products companies, future growth lies fairly close to home -- in neighboring European markets and in the markets of the old Eastern bloc. As a result, organization is a very hot issue. Almost all large companies are in the midst of moving from a single country-focused structure to one with a pan-European focus of some sort. In this shift from a decentralized structure with autonomous country units and business systems to a more centralized/coordinated approach with pan-European brand management, dedicated production facilities, and logistics structures, traditional country managers lose power. Very often they become the heads of local sales organizations. This is a sensitive issue, and many companies are still experimenting with the right balance between centralization and country power.

Trade marketing

Traditionally, German consumer companies had the same kind of organization as their US counterparts: a marketing department with product managers who guided and controlled the brands and a separate salesforce to sell to the trade. Over time, however, the salesforce has built a key account-management structure to reflect the power of retailers. Because of the increasing power of the retailers in Europe and traditional brand executives' lack of appreciation of what retailers really need, successful European consumer goods companies have moved to a new kind of hybrid organization, which they call "trade marketing," to bridge the gap between traditional brand management and the salesforce.

Although it is not modeled on the Japanese system, the trade marketing organization is like the Eigyou organization of Japanese companies -- but with a twist: German companies focus only on the big channels; Japanese companies spread themselves across the whole fragmented spectrum. Moreover, the European salesforce has a different role than the salesforce in an Eigyou organization: they are not an information source for marketing, but a means for pushing products through an ever more powerful retail trade.

Trade marketers focus on the different channel requirements: Which kinds of products do retailers want? In which sizes? With which packaging? At which price levels? Supported by which seasonal promotions? They then take this information to the brand managers, who develop products. Later on, they take these products to the salesforce and guide them on how best to communicate their value to retailers.

In time, German companies might actually do away with their sales and marketing functions entirely. Instead, there would be one organizational unit, trade marketing, which would integrate the traditional marketing function with the key account management function. In practice, however, because the backgrounds and cultures of sales and brand people are so divergent, these two functions have proven very difficult to bring together. So, for the time being, many big consumer companies have stopped part-way with a hybrid, trade marketing organizational unit.

In Japan, the channel remains the major vehicle for marketing and the Eigyou organization, the king of the company. It has responsibility for almost anything relating to marketing. Most dominant players in consumer-related industries -- Toyota, Bridgestone, Matsushita, Ajinomoto, Nippon Life Insurance, and even Kao -- secured their dominance by making, at a very early stage of their history, a major investment to create their channel base. And they have continued to invest in and maintain these relationships.

For many years Matsushita, with its thousands of affiliated retailers and wholesalers, used the Eigyou strategy to dominate the electronic and electrical appliance business in Japan. Nobody imagined that Sony would become as big as it has, because Sony never really controlled any of the wholesalers and retailers. It is simply incredible to Japanese business leaders that a company like Sony can be an industry leader based on Western-style consumer marketing, not on channel dominance. But Sony is the exception.

In most Japanese consumer companies, Eigyou experience remains one of the key prerequisites for a top management position. Marketing approaches are still Eigyou-driven. Top managers still focus on controlling channels and winning share from competitors, not on delivering value to consumers. They are very sensitive to the threat of their channels switching to their competitors as a source of supply, and so they immediately react if a competitor launches a new product -- a pattern of reaction that cumulatively leads to Japan's distinctive product churning.

In the past, this was the way to succeed. Companies succeeded or failed based on their strength in the channel, period. Today, however, consumer marketing is becoming more important, and consumers are becoming more sensitive to product performance than to whether a product is available on the shelf in a specific store at a specific time. Even so, with the exception of companies like Sony and a few others, marketing skills remain seriously underdeveloped. Japanese companies are not organized to deal with marketing as it is done in the rest of the world.

Marketing versus sales

The blending of sales and marketing is also an issue in the United States, but American companies lag behind Germany and Japan in the development of such hybrid departments. But that does not mean there are no fundamental changes afoot. Packaged-goods companies are experiencing much the same kind of need to integrate their control and information systems more closely with those of key accounts, as P&G now does with Wal-Mart.

Marketing plans used to be developed by brand managers and then executed by sales. Increasingly, however, sales -- as in Germany and Japan -- is proving a key element of marketing. As the effectiveness of brand advertising declines and the importance of relationships with retailers increases, the attention of top management is shifting toward key accounts and away from traditional brand marketing.

Driving these organizational changes are changes in the availability of information. Until recently, sales information came into the market research department of US packaged-goods companies via a syndicated supplier like IRI or Nielsen. It then flowed to brand management and finally to the salesforce. Today, there are systems like Sales Partner, developed by IRI, that enable a salesperson to access and apply all the information that used to go to brand managers in preparing and managing his or her accounts. As a result, the salesforce can themselves do, perhaps in a few hours, a lot of the marketing analyses that used to require weeks of work by a brand manager. In fact, new analytical tools, data, and software are steadily reducing the number of functions that brand managers perform.

This is all part of a distinct, long-term shift in the size and skill level of the brand management group in the United States relative to those of key account salespeople. Holding up the speed of this shift is the fact that it is still very difficult to get high-powered MBAs into sales. It is also very difficult to get talented people to leave brand management and become a key account manager. Only a tiny handful of people in the whole of the US consumer goods business have made this kind of transition. But it is increasingly going to be the career path of choice. True, the salesforce as a whole will continue to shrink because the retail sales function is becoming less and less important in the United States. But the skill level and information content of the key account job will continue to grow.

Global networks

Because the US consumer market is mature and highly competitive, consumer companies have to look elsewhere around the globe to sustain the kind of sales growth that investors demand. Already, the rate of growth in East European, Latin American, and Southeast Asian markets is three times as high as that in mature US and EC markets. American companies will also have to look to their EC and Japanese counterparts for new products -- and they to the United States. There are few truly innovative ideas in consumer goods, and they spread rapidly. Everybody needs to grasp an idea wherever it arises as quickly as possible because the new wrinkle that comes up in Japan in July can usually be bought in Dallas in January.

All this argues persuasively for the need to develop an effective global network to pick up innovative product, packaging, and even advertising ideas, no matter where they first take shape. This is what P&G has done. Competing in Japan against Kao, it has taken a Kao innovation like condensed laundry detergent and sold it around the world. And this, in turn, argues for a serious internationalization of the cadre of managers in important positions throughout a company.

As this global perspective grows in importance, US consumer goods companies are finally incorporating people from Europe and Asia into their corporate management structures. They may have a US-based headquarters, but a P&G or a Pepsi-Cola or a Philip Morris is rapidly becoming a company without a home country. More and more of the senior people in these companies are non-US nationals who have spent a significant portion of their careers outside the United States. This is also true for European companies. In the past, their boards were composed only of people of the company's home nationality -- Nestle had a Swiss, Unilever, a Dutch/English board. Today these boards are as international as the markets they serve.

Channels, functional areas, and organization -- the heart of today's consumer systems -- vary widely around the Triad. Each system is unique to its environment. Each has its strengths and weaknesses. None can work on a global basis without deep modification. None is complete in itself. Indeed, as consumer companies from Japan, Germany, and the United States continue to globalize, their future will lie in the extent to which they can learn from their counterparts around the world. Broadly speaking, Japanese and German companies will have learned classic product market strategy and advertising from the United States; German and US companies, rapid product development and manufacturing from the Japanese; and US companies, from the Germans and the Japanese, how to build collaborative relationships with retailers.

* See Kevin Jones and Tatsuo Ohbora, "Managing the heretical company," The McKinsey Quarterly, 1990 Number 3, pp. 20-45.

Authors' note: We would like to acknowledge the valuable contribution of Stuart Flack, who helped us synthesize our views into an organized picture of Triad developments.

Tatsuo Ohbora is a Principal in the Tokyo office; Andrew Parsons, a Director in the New York office; and Hajo Riesenbeck, a Director in the Dusseldorf office. Each works with consumer goods and services companies in their respective regions. Copyright |C~ 1992 by McKinsey & Company, Inc. All rights reserved.
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No portion of this article can be reproduced without the express written permission from the copyright holder.
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Author:Ohbora, Tatsuo; Parsons, Andrew; Riesenbeck, Hajo
Publication:The McKinsey Quarterly
Date:Jun 22, 1992
Words:6619
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