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Market power and successful global competition.

American companies have long been influenced by the philosophy of consumer needs and wants, but this is no longer sufficient for successful marketing. Every firm should have a customer component, but this alone will not allow a firm to develop a competitive advantage. The customer is only one of many potential resources available to an organization to achieve its end.

The American marketing response to international competition continues to advocate a functional approach to marketing in which meeting these customer needs and wants is perceived as the way to achieve success. Other disciplines focus on other goals. Financial analysts advocate maximizing stockholder wealth as a way to create a competitive advantage. Economists tell us that supply and demand dictate a firm's ability to create an advantage, while human resource specialists teach that maximizing human resources creates the difference between success and failure. This has created an environment where each group's philosophical framework is counterproductive when placed next to an opposing functional view.

The authors do not reject any of these functional applications, but instead see them as resources (means) rather than philosophical ends in themselves. All of these functions are required to develop a corporate strategy, but the artificial boundaries between them are counterproductive.

Marketing and Customer Orientation

It is difficult to find a marketing principles or management textbook that develops any approach other than an identical historical evolution of the marketing concept/orientation (such as Kotler and Armstrong 1989). Authors invariably trace marketing practice from production to product to sales to the marketing concept--and now to a societal marketing concept. This has served to reinforce the marketing paradigm so that many have been led to believe that the marketing concept has been validated. Now, however, evidence is mounting that contrasts this position:

Given its widely acknowledged importance, one might expect the concept to have a clear meaning, a rich tradition of theory development, and a related body of empirical findings. On the contrary, a close examination of the literature reveals a lack of clear definition, little careful attention to measurement issue, and virtually no empirically based theory. Further, the literature pays little attention to the contextual factors that may make a market orientation either more or less appropriate for a particular business (Kohli and Jaworski 1990, p. 1).

The current American marketing paradigm (first developed in the 1950s) advocates that the organization must analyze customer needs and wants, and then produce products or services to fill those needs and wants at a profit. Therefore, it is hypothesized that organizations that continue to meet internal and external customer needs and wants will prosper, while those that do not will decline.

Kotler defines marketing as "a social and managerial process by which individuals and groups obtain what they need and want through creating and exchanging products and value with others" (1988, p. 3). This definition of marketing emerges from the earlier work of Peter Drucker: "There is only one valid definition of a business purpose: to create a customer.... It is the customer who determines what the business is.... Because it is its purpose to create a customer, any business enterprise has two -- and only these two basic functions: marketing and innovation"(1954, p. 37).

Theodore Levitt contributed to this philosophy when he speculated (incorrectly) that the railroads did not stop growing because the requirements for transporting passengers and freight declined. Rather "they defined their industry wrong....because they were railroad-oriented instead of transportation-oriented; they were product-oriented instead of customer-oriented" (1960, p. 45).

Levitt's example, from one of the most quoted Harvard Business Review articles, has little if any historical justification (Morris 1990). American railroad managers were no more myopic than those in Canada, Japan and Western Europe. U.S. government regulatory policy (followed by the concentration of resources) shifted to truck, auto and air transportation after World War II. Government regulations, not misguided management or poor marketing practices, kept the railroads from expanding:

These statutory restrictions (sec. 5(2) (b) of the I.C. Act and 408(b) Civil Aeronautics Act prevent a railroad acquiring an air line or highway carrier, or any other surface common carrier acquiring an airline, unless such highway or air transportation is auxiliary or supplemental to its main operations. This applies not only to acquisition, but to new lines or extensions. (Pan American Airways Co. v. Civil Aeronautics Board, -- 121 FED(2d)810(1941). (Tedrow 1951, p. 139,140)

Such condemnation of the railroads, oil, film and auto industries was more a reflection of a particular anti-big-business stance than a balanced, historic interpretation of the reality of economic concentration. While Americans were advocating and orchestrating one point of view, Asian and European competitors were following another.

Market Power

A customer component (means) can be successful as part of a market power framework, but not as a separate needs and wants functional philosophy. Examples will demonstrate that marketing in the United States has been based on a customer orientation, while global competitors have developed a different perspective of customers within the more encompassing orientation of market power. This difference in approach enables Japanese, Korean, Taiwanese and German firms to grow into globally dominating organizations. American firms that continue to segment markets in an effort to satisfy customers do it at the expense of their international and national competitiveness.

The concept of market power has had several definitions: "A dominant firm structure is one in which a firm is able to control to a degree that competitive environment in which all firms operate" (White 1983, p. 3); "Market power is therefore not so much a capacity to do something as the ability to prevent others from doing it also" (Kingston 1984, p. 9); "One of the most important determinants of economic performance is market power, or the abilities of firms to influence the prices of their products either through independent actions or through actions coordinated with others" (Baldwin 1987, p. 3). Market power is the use/employment of organization capacity to direct and block actual, potential or presumed competitors from access to targeted markets. Marketing, human, physical, intangible and financial resources are then utilized to block competitors from access to targeted markets and not as competing functional areas (Morris 1992). Historically, market power has not been given a role in the development of American marketing philosophy.

Global Organizations Utilize Market Power

A fundamental change in philosophy is required, or the economic future of the nation will continue to be in jeopardy. Competitors in Asia and Europe have developed a different historic view based on market power. American companies acquired market power first through isolation and natural resources, and then internationally with an intact industrial complex after World Wars I and II. But because of the present misperception that this was, or is, based on a needs and wants philosophy, we are now in danger of losing market power to international competitors who have taken an economic approach similar to Japan's.

A market power approach of unifying and applying national capacity has been in effect in Japan since the last century, following the end of the 300-year-old Tokugawa shogunate in 1868. It was replaced with an imperial form of government under Emperor Meiji. During the Tokugawa era, Japan was ruled by a samurai class that resisted all outside intervention. With Commodore Perry's limited opening of Japan in 1853, the ruling class realized how vulnerable they were to Western military might. This issue of how to deal with the West led to the collapse of the shogunate (Latourette 1946). Although the imperial position was originally opposed to the opening of Japan, this position changed immediately after the collapse of the shogunate. The Japanese then learned and did whatever it took to become a world military and economic power. The best minds of Europe and America were brought to Japan to assist in this transformation. However, when the Japanese believed they were able to continue without assistance, the Westerners were sent back home.

A two-tier, market power based economic structure, with one tier for the internal market and one for the external, was developed. The government supported and created large businesses and financial organizations to handle external trade. These organizations (zaibatsu) were then turned over to ruling families such as Mitsui, Mitsubishi, Sumitumo and Yasudo. Internal competition for the zaibatsu was nonexistent. In 1932 the military became dissatisfied with the zaibatsu's lack of enthusiastic support for its expansion policy, so it created its own zaibutsu: Nissan, Nihon Chisso, Nihon Soda and Showa Denko. At this point the original zaibatsu families began to support expansionist military policy.

At the conclusion of World War II, in an effort to duplicate Franklin Roosevelt's New Deal anti-monopoly philosophy in Japan, General Douglas MacArthur dismantled the zaibatsu and purged top management. But the United States government did a complete about-face in policy towards Japan in 1947 because of the Communist success in the civil war in China.

In 1949 the Anti-monopoly Law was revised and a definition of competition inserted which made the law a dead letter. After 1951 a number of business combinations began to emerge, linked by ex-Zaibatsu personnel and by common relations with the four or five largest banks. In 1952 the Diet removed the ban on the use of Zaibatsu names and many companies have now resumed their old names. In 1953 the Anti-monopoly Law was again revised and cartels made legal (Tiedemann 1955, p. 92).

The zaibatsu, now called keiretsu, were encouraged and supported along with other companies such as Toyota and Sony. When the Korean War broke out in 1950, Japan became a major military supplier, which once again made Japan a rising industrial power.

Japanese culture was prepared to return to and accept the concentration and application of resources necessary to block competition in a global marketplace to achieve a collective national end. The United States encouraged and supported this continued effort to restore the former business structure in order to accelerate Japan's recovery. Japan has been, and continues to be, successful in the use/employment of market power to develop its national interest. The needs and wants of internal customers have a low priority as compared to the concentration of resources to block competitors from attaining market share in home and foreign markets (Kingston 1987).

American marketing academics are now pointing to the Japanese emphasis on quality as an example of what the American marketing concept should be. According to this argument, the Japanese are succeeding because they are customer oriented and are giving the customer top-quality products at the lowest prices. Many academics laud individuals like Edward Deming, the father of quality control, who supposedly converted a nation of junk producers to a nation of manufacturers of the best quality products in the world. This position has no historic substantiation. Japan has produced quality products for its home market for centuries. Quality has been an important part of Japan's culture for a thousand years.

Modern Japan's inventive talent, her workmanship and her capital as well as her potential markets have thus to satisfy two distinct demands -- (1) for Western goods and (2) for traditional Japanese goods -- while her older, more experienced and financially stronger competitors in the West are freed from this complication. It should be emphasized, furthermore, that the production of the innumerable commodities manufactured solely for Japan's home market is not confined to small plants employing craftsmen, and economically and socially representing the "old" Japan. On the contrary, the manufacture of these goods has been one of the chief tasks of modern Japanese factories (Stein 1935, p. 16-17).

Producing quality products has not always been the correct strategy when access to foreign or domestic markets is blocked. The environment, competitors and economic conditions determine the approach to product quality. The Japanese, by design, produced low quality items for export because the British were able to block access to the high end of the market before 1940. During the worldwide depression of the 1930s and after World War II, Japan entered the low end of the foreign market because the available customers who were in that segment of the market could afford only low-quality, low-priced items; in addition there were barriers at the high end. Competitive conditions and resources dictate action, not a single-solution approach such as customer needs and wants or quality. The world, unfortunately, is more complicated.

Japan, Korea, Germany, France, Taiwan, Great Britain, the Netherlands and, indeed, all nations have developed varying views of the application of market power. European and Asian approaches are much more similar to each other than they are to the American model. The Taiwanese have their Da Chi Yeh Chia, the Koreans their Chaebol, the Germans their Kartels and the British and Dutch had their trading companies. Americans, in contrast, have had the Sherman Antitrust Act since 1890.

Nevertheless, a closer look at the record suggests that underlying national differences continued to leave their mark on regulatory policy. Each country had its own mode of supervision, its own politics of regulation, its own way of dealing with price cutting, and resale-price maintenance. Public policy continued to reflect the fact that large enterprise functioned in distinct and distinctive national milieus (Keller 1980, p. 171).

The European community in 1992, including a unified Germany, is going to combine national capacity to create one of the largest single markets in the world. Barriers will be lowered among the twelve member nations. The EEC will have common internal regulations, directives, decisions, recommendations and opinions. The needs and wants of European customers may be filled by member nations blocking outside access with market power.

The American marketing theory of the needs and wants of customers, now with the addition of a quality component, can do little to overcome these obstacles. Thus, the American government is starting to create market power by negotiating free trade agreements with Canada and Mexico. This is an attempt to apply market power based on Asian and European strategies. Such a reorganization of our economy goes well beyond the concept of customer needs and wants. It is market power, or blocking competitors access to targeted markets through the utilization of all of its resources, that will allow America to become competitive.

Conclusion

Intuitively, we realize utilization of a dominant customer needs and wants concept is not sufficient to sustain organizational growth, survival and development. Yet the philosophy persists in the United States as part of a continued anti-big-business position that is unique to the country. What is advocated is the incorporation of the customer (means) into a market power framework. Customers are one component (and often not the most important one) that may or may not be applied to achieve a clearly defined end.

Why has the American marketing community been slow to accept a more encompassing market power paradigm rather than a narrow, customer orientation paradigm? American industries such as the automobile, television, and machine tools have deteriorated over the past 30 years because of an unwillingness to adapt. American business practice was not required to change. The old international traders of England, Germany, France and the Netherlands (now combining as part of the European Economic Community) were devastated after World War II. With the assistance of the United States, these countries were rebuilt to serve as a buffer against Communism. These nations have been much more active in international trade; and their regulatory, legal and social systems support this activity. With the twin effect of a financially strong Japan and the reality of a unified Europe, the true marketing myopia is ours. We continue to follow the limited marketing view which is based on how the world should be rather than how the world was or is.

There has been success in the application of market power in the United Slates. For example, NEC of Japan is blocked from entering the U.S. telephone industry by government regulation. Australian farmers are blocked from American agricultural markets. These blocking strategies are an example of the required market power paradigm shift, applying organizational capacity that blocks competition from access to targeted markets. A use/employment of market power is advocated from the position of enlightened self interest. A rethinking of the philosophy of needs and wants must occur if we are to compete with foreign firms trading both at home and abroad. American businesses, like others, must improve their capacity to block competition from access to targeted markets.

References

Baldwin, W. L. 1987. Marketing power, competition, and antitrust policy. Homewood, Ill.: Irwin.

Drucker, P. 1954. The practice of management. New York: Harper and Row.

Keller, M. 1980. Regulation of the large enterprise: The United States experience in comparative perspective. In Managerial hierarchies: Comparative perspectives on the rise of the modern industrial enterprise, ed. A.D. Chandler, Jr. and H. Daems, 161-181. Cambridge, Mass.: Harvard University Press.

Kingston, W. 1984. The political economy of innovation. The Hague: Martinus Nyhoff.

-----. 1987. ed. Direct protection of innovation. Dordrecht, The Netherlands: Kluwer Academic Publishers.

Kohli, A.K., and B.J. Jaworski. 1990. Market orientation: The construct, research propositions, and managerial implications. Journal of Marketing, 54(2),1-18.

Kotler, P. 1988. Marketing management. 3rd ed. Englewood Cliffs: Prentice Hall.

Kotler, P. and G. Armstrong. 1989. Principles of marketing. 4th ed. Englewood Cliffs, N.J.: Prentice Hall.

Latourette, K.S. 1946. A short history of the Far East. New York: Macmillan.

Levitt, T. 1960. Marketing myopia. Harvard Business Review, 38(4), 45-56.

Morris, D.J. 1990. Railroad and film industries: Were they myopic? Journal of the Academy of Marketing Science, 18(4), 279-283.

-----. 1992. Marketing as a means to achieve organizational ends 3rd ed. West Haven, Conn.: University of New Haven Press.

Stein, G. 1935. Made in Japan. London: Methuen.

Tedrow, J.H. 1951. Regulation of transportation. 4th ed. Dubuque, Ia.: Wm. C. Brown.

Tiedemann, A. 1955. Regulation of transportation. 4th ed. Princeton: Van Nostrand.

White, A.P. 1983. The dominant firm: A study of market power. Ann Arbor, Mich.: UMI Research Press.

David J. Morris, Jr. is Associate Professor of Marketing at the University of New Haven, New Haven, Connecticut and David C. Kimball is Assistant Professor of Marketing at Elms College, Chicopee, Massachusetts.
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Author:Morris, David J.; Kimball, David C.
Publication:Review of Business
Date:Dec 22, 1992
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