A New Way to Market

By The McKinsey Quarterly

As the marketplace evolves ever more rapidly, marketers struggle to keep pace. Their traditional stratagems-redesigning market segmentations, building strong brands, and hiring cadres of marketing managers-continue to be necessary. But unless those solutions can be mobilized rapidly, many marketers could find themselves overtaken by their competitors, for a fundamentally different way of organizing companies to exploit opportunity seems to be emerging among many growth leaders. You might call them venture-marketing organizations (VMOs), since like venture capitalists they are quick to spot new possibilities, to allocate resources to the best ones, and to cut their losses as they go.

Such groups realize that to outpace the market consistently, they must not only create fluid organizational structures but also provide for unyielding rigor in measurement and decision making. As a result, they enjoy revenue growth rates that on average are one and a half times those of the competition (exhibit). Incumbent or attacker alike, they are capturing more than their share of market opportunities.

Stay Fluid

When traditional marketers think of organization, they mean structure: distinct product, channel, and customer groups focusing on specific functional tasks, such as brand management, customer segment management, and market research. Functional managers play the pivotal roles in these functionally focused groups, which are responsible for generating ideas and taking them to market.

But the traditional approach hinders the fluidity required to keep pace with the market's evolution. For when market priorities change, traditionalists take a "wreck and rebuild" approach that consumes the precious time of top executives, disrupts action on the front lines, and, worst of all, often fails to yield the intended results. Sixty-seven percent of respondents in a Watson Wyatt survey1 said that in most cases the complex and confusing changes companies passed through during such reorganizations did little to improve their performance.

New-style marketing groups understand that formal structures can't drive value in fast-moving environments. 818f521i To make organizations keep pace with the market, these groups rely not on periodic restructurings but on a continual process of evolution. VMOs do have designated managers for core products, segments, and channels, but the number of these managers, the scope of their responsibilities, and the people to whom they report evolve constantly to reflect changing opportunities.

At Dell Computer, for instance, the incentive system rewards marketing managers who successfully identify and capture so many market opportunities that some of their business must be passed on to other managers. Divisions divide into smaller and smaller units, and profit-and-loss responsibility spreads out among more and more managers-an approach that encourages all of them to turn the needs of their customers into products and services as quickly as possible.

First USA's credit card unit is another organization whose strong growth over the past few years has been propelled by the new approach. It has few solid-line reporting relationships. New positions are created above, beside, or below their predecessors, and new people are constantly being placed in shared resource pools, which are constantly reconfigured dynamically.

Although First USA has had performance problems since being acquired by Bank One, the phenomenal earlier growth rate of the credit card issuer was propelled largely by its VMO approach. First USA routinely makes organizational changes in the ordinary flow of business, without slowing down day-to-day progress on initiatives. After identifying new opportunities worth pursuing, the company quickly determines what specialized skills are required and pulls together a suitable "dream team." To provide qualified leaders quickly, First USA maintains a pool of available managers whose specialized skills can be used to develop and launch a variety of new card products. If building the dream team means pulling people out of their current jobs, finding them in the ranks of partners, or hiring from the outside, those people are pulled, found, or hired.

Contrast First USA's venture-marketing philosophy with the standard approach of financial-services marketing organizations.

One leading traditional credit card issuer places all of its marketing resources in a single organization split into distinct groups focusing on functional tasks. Instead of evolving these groups continually, the company reorganizes them every two years to create the structure for the next business cycle. Responsibility for capturing new opportunities is assigned to existing functional groups. This traditional marketer has a strong brand name, uses a number of channels with great skill, segments its markets effectively, and runs a high-impact direct-marketing operation. Yet starting from a smaller base, First USA issued five times as many new credit cards during a recent three-year period.

Another VMO-style company, Starbucks, tackles new opportunities by assembling teams whose full-time leaders often come from the functional marketing areas most critical to success. If the originator of an idea has the right qualifications, that person may take the lead role. When teams require specialized skills that are not available internally, Starbucks looks outside. To lead its Store of the Future project, for example, it hired a top executive with retail experience away from Universal Studios, and to develop its lunch service concept it chose a manager from Host Marriott Services.

After teams at First USA and Starbucks have successfully launched new products and services, some members continue to manage or sustain them;

others go back into a pool and are quickly redeployed on new-opportunity teams; still others return to line management jobs. In all cases, success on a team is vital for promotion or for a bigger leadership role in the next project.

This approach to teamwork also prevails when venture marketers collaborate with outside partners. Starbucks, for instance, wanted to launch a new ice cream product, but executives quickly realized that the company lacked the in-house packaging and channel management skills to move quickly enough. It therefore teamed up with Dreyer's Grand Ice Cream. Starbucks understood the specific marketing skills it needed and acquired them with the dream team philosophy in mind. As a result, the company launched the new product in half of the usual time, and within four months it became the top-selling brand of coffee ice cream.

Accountability and Performance Tracking

Executives tend to shy away from fluidity because they associate it with chaos. But fluidity can be controlled if discipline is applied in the right places. In particular, VMOs have clear mandates of accountability for each assignment-that is, clear statements of what marketers are expected to achieve. And these organizations are highly disciplined about tracking performance, marketing investments, and marketing returns. What they don't have are job descriptions that constrain any marketer's work.

When one young analyst at Enron, for example, conceived a new weather-insurance product for utilities, the company allowed her to lead a new group to develop and launch it. She received clear financial targets and had to complete daily profit-and-loss statements that quickly showed whether the product was earning the required return on investment. In this case, the return was strong, and the group now continues to grow. But Enron routinely pulls the plug on low-performing ventures.

To reinforce rigorous performance targets, one venture marketer uses proprietary program management software to set clear financial targets and deadlines for realizing new market opportunities. A manager who assumes responsibility for one of these opportunities knows exactly what will be expected and when-and can feel confident that the rewards for strong performance will be substantial.

Of course, achieving good results calls for much more than merely embracing an approach; companies must also put it into practice. Effective VMOs follow three critical principles for day-to-day execution. To ensure that plenty of good ideas enter the funnel, these organizations make it everyone's job to identify opportunities. To give priority to the best opportunities and to coordinate resources quickly, they combine the use of advanced technology with decision making by top management. Finally, to make themselves more flexible, they hire people for roles, not jobs.

Identifying Opportunities

To capture opportunities continually, a company must have a continual flow of ideas. Venture marketers encourage this flow with a combination of cultural reinforcements, feedback loops, and explicit financial and professional incentives to make everyone, rather than a specific group or department, responsible for identifying opportunities.

At Trilogy Software, for example, the marketing organization's mission is "100 percent understood by everyone to be identifying and capturing the biggest new market opportunities," according to the marketing vice president. Instead of vesting responsibility for identifying new opportunities in a new-business development group, Trilogy has charged all marketers-and, to a large extent, all employees-with that responsibility. As part of an entry-level training exercise, for example, one new hire came up with the idea of expanding a core service line by bundling products and targeting a new segment. Instead of reporting to his original assignment when training ended, he joined a team newly assembled to pursue the opportunity, which now accounts for 30 percent of the company's business.

Starbucks uses strong cultural incentives to drive the identification of opportunities. All company employees are called "partners," signaling a level of responsibility maintained by few companies with sales in the billions of dollars. Anyone who has an idea uses a one-page form to pass it to the senior executive team-and gets a response. When the company pursues an idea, its author, regardless of tenure or title, is typically invited to join the launch team as a full-time member.

Consider, for example, the evolution of what eventually became Starbucks's Frappuccino, a cold coffee drink. A front-line manager had the idea in May 1994, and a five-person, top-level team soon gave it a high priority. In June and July 1994, the team developed marketing, packaging, and channel approaches; a joint venture with PepsiCo was in place by August. The manager who originated the proposal was put in charge of a pilot project, and the first-wave rollout started in October 1994. National launch of the product followed in May 1995, and in its first year it accounted for 11 percent of the company's sales.

Speed and Coordination

Transforming a pipeline full of ideas into a value-generating portfolio of products and services is hard. Many companies fall into some combination of three time-wasting traps. They give each functional group (such as product management) a number of ideas to evaluate, and the heads of those groups must then compete for funding. They establish complex "gating" processes, often with dozens of steps and substeps, for launching new ideas. And they try to achieve consensus among all key leaders before moving forward. By contrast, the new-style organization uses technology where possible to automate many decisions-and fills in gaps with fast, centralized, senior-level decision making.

Trilogy Software, for instance, has helped its clients (and its own internal operations) by developing a computer program that includes data on their past marketing campaigns. The program allows users to predict which marketing vehicles work best for different combinations of customers and products, as well as the likely financial outcome of deploying any particular vehicle. What once took weeks of manual market research now requires just a few hours of automated testing.

When technology tools can't sort out the options, VMOs resort to unabashed top-down decision making by a three- or four-member senior-executive group (usually including the chief executive officer) that has the authority to make decisions and allocate resources immediately. The group's members may devote as many as two days a month to making sure that the right opportunities get priority.

Starbucks, for example, has a high-level steering committee that meets every fortnight to rate each new opportunity by two simple criteria: its effect on the company's revenue growth and its impact on the complexity of the company's retail stores. The committee uses a one-page template for each of these ideas and relies on a full-time process manager to ensure that information in it is presented consistently. Starbucks sets a minimum goal of $4 million in annual revenue for potential ideas but will raise or lower this figure if they make its retail stores more or less complex, respectively. At The Home Depot, CEO Arthur M. Blank makes many new-business decisions unilaterally, not waiting to build a consensus throughout the organization, but with a robust fact base gathered by a central market-analysis group; moving quickly doesn't mean making decisions carelessly.

Each company's approach is simple, transparent, fast, and rigorous. The process supports entrepreneurialism by ensuring that anyone who generates an idea gets the freedom and the resources to pursue it or clear feedback about why it has been denied.

Hire for Roles, Not Jobs

Most traditional marketers hire people for specific jobs that are viewed as "permanent." This approach doesn't provide the flexibility needed to keep pace with changing markets.

When one telecommunications company, for example, built a team to manage customer segments, it hired industry experts for key segment management jobs: a sales manager from a regional bank for the banking segment, a retail merchandiser for the retail customer segment, and so on. These people's skills were geared to reporting on industry-specific trends, not to anticipating the needs of changing customer segments.

As the market evolved, the company soon realized that a segmentation scheme based on product requirements would yield greater value than one based on industries, but the industry-focused managers lacked the marketing skills needed to identify and pursue opportunities outside their industries of expertise. While the marketing vice president struggled to replace these segment managers in the face of corporate hiring and head count constraints, the company lost share to competitors whose customer segments were based on product requirements.

New-style marketing organizations, by contrast, hire marketers not for jobs but for two broad kinds of roles: those of integrators and specialists. Integrators are marketers with broad skills who coordinate the delivery of products and services to the market from beginning to end. Specialists-more narrowly focused marketers with specialized skills-can be mobilized quickly to provide the particular expertise a given opportunity team requires.

Hiring people with the right marketing skills is critical but not sufficient: companies such as Starbucks and Trilogy Software also look for entrepreneurially minded candidates who can thrive in uncertain, rapidly changing environments. To ensure that the right candidates are chosen, recruiting at these companies is a line rather than staff responsibility, for traditional corporate recruiting administrators and third-party executive search firms can rarely link marketing strategies with candidate-screening procedures in an effective way.