the marketing mix is made up of the 4ps, product, place | mar

 

The making and marketing of the mechanical reaper is one of the great triumphs of modern civilization.1Until the 1830’s,  crops were harvested by hand, using a 4,000 year old process as  depicted  in  the  detailed  dr awings on the walls of Egyptian tombs. Think about it, 4,000 years and no real progress in the harvesting process. The mechanization of farming in the United States was also a major reason why the United States became a super-power 100 years ago, surging ahead of every other country in its economic output.  Cyrus Hall McCormick grew up on his father’s farm of 1,800 acres at Walnut Grove, in the Shenandoah Valley  of  Virginia.  His  father  Robert  had  spent  many  years  trying  to  improve  basic  farm  equipment  and  trying to invent a horse-drawn  reaper  to replace  the  hand-held scythe. To  reap is  to  cut  or  harvest  a  crop such  as  wheat.  Robert passed on his rather rickety invention that was still not sturdy enough to handle the working conditions (the roughness of the paddocks), to his son Cyrus in the late 1820’s. Cyrus improved on it and made it sturdier but his real genius was not in his invention of the reaper but in his innovative and entrepreneurial marketing of his invention. The 22-year-old Cyrus was reported to have farm-tested his latest version of  the reaper in 1831 and 1832 (not entirely successfully), but he did not take out a patent until 1834 when he heard that another inventor, H.F.  Mann,  had  developed  a  very  similar  machine  and  was  promoting  it  in  the  state  of  New  York.McCormick was not able to renew his patent and extend it in the late 1840’s because a number of people disputed the primacy of his first patent.  He wisely recognized that his success would not come from patent protection and defending a patent. Time and time again innovators have made this mistake. He understood that  success  would  come  from  his  mass  marketing  efforts,  that  would  generate  mass  manufacturing,  that  would  reduce  costs,  that  would  lead  to  lower  prices  and  more  profits  to  be  invested  back  in  product  and  market  development,  that  would  lead  to  even  greater  sales  growth  and  so  a  virtuous  cycle  (sometimes  called a virtuous circle or spiral) is created that leads to the domination of a pioneering company that leaves the competition in the dust. By 1850, there were some 30 reaper firms that were imitating/innovating his 1    This case is drawn from Cyrus McCormick, The Century of the Reaper, Boston, Houghton Mifflin, 1931 and         Norbet Lyons, The McCormick Reaper Legend, New York, Exposition Press, 1955.

                           Module 1  • What is Marketing?  •  Cases  •  ©Backbone Press 2009                                                                  2reaper but most firms were not much more than extended blacksmith/foundry works making one reaper a week. Their only future would be to become contract suppliers to McCormick’s  mass  marketing  machine.In fact, in the 1840’s McCormick already was having his reaper made under license by a number of small businesses  in  Illinois,  Iowa,  Michigan,  Missouri,  Ohio,  Tennessee,  and  Wisconsin.  Several  of  these  licensees (Such as Seymour and Morgan, Mann and the Fountain Brothers) became competitors by adding their  own  improvements.  But  by  then  it  did  not  matter,  because  they  had  helped  grow  McCormick’s  business and he most certainly was not standing still. Indeed, in many cases he was happy to let them go.  From 1841 to 1845, McCormick constantly improved the design, but he raged at the damage done to his reputation (not to mention the farmers  crops)  by  some  licensees’ slip-shod manufacturing. Product quality was  really important from the get go. He decided the only way to maintain and improve the quality of his machines  was  to  terminate existing  licensee  agreements and manufacture them all himself. Classic  lesson. If you cannot control the quality of your suppliers then you cannot outsource –   a lesson being repeatedly learned  today  in  global  sourcing  manufacturing  and  customer  services.  If  you  do  not  have  the  quality  systems controls, don’t outsource.   First, he set up a proper manufacturing operation in Cincinnati in 1845, a business owned by a Mr. Brown and  run  by  his  brother,  Leander  McCormick.   In  1846,  he  set  up  a  similar  operation  in  New  York. Still unhappy  with  the  manufacturing  quality,  he  moved  to  Chicago  where  in  1848  he  made  500  of  the  778  McCormick  reapers  built  that  year.  In  1849,  1,500  reapers  were  built  in  his  manufacturing  plant,  and  in  1856,  4,000.  He  set  up  one  of  the  first  plants  in  the  world  to  mass  produce  standardized  parts,  ideally  positioned on the river and lake front east of Massachusetts Avenue, with barges and sailboats able to load on  one  side  of  the  plant  and  a  railway  line  on  the  other.  The  lathes,  grinders,  and  saws  in  his  plant  were  driven by one of the first large steam engines in Chicago. In 1859, his brother William wrote to him saying, “Your  money  has  been  made  not  out  of  your  patents  but  by  making  and  selling  machines.  “  He  had  the  genius to  invent  the  modern  business.  The  following  quote  from  his  grandson,  published  in  1931,  seems  particularly modern:He preached quality to the factory men until it was engraved on their hearts. In modern parlance, he  “sold”  them  quality  so  well  they  understood  the  necessity  for  it  and  therefore  believed  in  it.  Each year the McCormick reaper became heavier, stronger, better: each year it gained more favorwith the farmers. My father has told me how he used to hear his father say, “I don’t want to make my entire profit from a single sale,  I want to make the machines so good that the farmer  and  his  sons will come back again and again to buy more McCormick machines.Note the stress on customer focus, product quality and innovation, the continuous improvement effort, and the objective of building customer satisfaction and long-term brand loyalty. If this sounds too good to be true, it should also be recognized that it took Cyrus from 1831 to 1842 to be really satisfied with the quality of  his  reaper  and  in  that  year  he  took  the  extraordinarily  bold  step  of  offering  an  absolute  guaranty  of  satisfactory performance or the return of your money. Such a guaranty was unheard of for any product,  let alone the most expensive farm implement you could buy. And he stood by his warranty. The gearing on the 1853 reapers was defective and it was replaced, free of cost to all purchasers.McCormick’s Marketing Insights1.    He  understood  that  manufacturing  and  marketing  process  innovation was  an  important  as  product  invention,  even  more  important.  He  could  and  did  buy  other  patented  feature  improvements  but  only  he  could build the manufacturing and marketing operation he created.  2.  He recognized early on that the huge market for the reaper was in the West and not the East, so he set up in Chicago, at a time when there were still wolves in its suburbs. This gave him a huge location advantage over his major eastern competitors.3.    He  understood  not  only  where  the  market  was  but  also the  harvesting  process  that  demanded  fast delivery and excellent after-sales service. After all, the farmer’s crop and livelihood were at stake. Ti ming in harvesting  is  very  i mportant; any  delay exposed the crop to catastrophic loss from weather, insects, or birds.

                           Module 1  • What is Marketing?  •  Cases  •  ©Backbone Press 2009                                                                  34.  He understood the opportunity presented by the Civil War (a political event). The manpower shortage on  the  farm  encouraged  the  use  of  labor-saving  technology  and  the  huge  armies  greatly  increased  the  national demand for buying grain. McCormick supplied both sides,  the South on the sly.   5.  He understood the opportunity created by the new popular press to communicate with farmers who had just become literate.6.  He understood how to use the railway, the new distribution technology, very effectively.   7.  He saw how to use the local merchants as sub-agents in the sales, service, and d ebt collection processes. The local merchants knew and trusted the farmers and vice versa, thus greatly reducing bad debts. 8.  He understood the importance of having quality manufacturing management and hired his brother to run the  operation.  As  an  aside,  his  factory  burned  down  in  1851  and  again  in  1871  which  in  the  end  was  fortuitous because it allowed improvements in production processes and increases in capacity.9.      He  understood  the  importance  of  having  a  highly  respected  business  partner  (William  Ogden,  the  undisputed first citizen of Chicago) as an early partner to help open the doors to cheap financing and to deal with  local  regulations  and  politics.  He  also  understood  the  importance  of  having  Ogden  as  a  silent  or  sleeping partner who would stay out of the day-to-day running of the business and not create debilitating internal fights over reinvestments and strategy.McCormick’s Marketing Process InnovationsProduct Quality.  The  product  was  shipped  only  partly  assembled  (an  early  example  of  a  postponed  assembly  process  that  saved   freight  costs  and  reduce  manufacturing  costs).  The  farmer  had  to  attach  the  wheels,  and  other  parts,  and  also  adjust  the  settings  of  the  machine.  Not  only  were  excellent  written  assembly instructions provided, but the parts were painted with numbers on them to help assembly and later with  simple  directions  on  how  to  adjust  settings  (such  as  indicating  with  an  arrow  which  way  to  turn  a handle or  move  a  bolt  in  a  slot).  Cyrus  recognized  that  quality  performance  and  durability  depended  on  how well the farmer assembled the reaper, set it, and maintained it, something that many modern marketers have never learned or forgot with their instructions. In the early years factory experts were sent out to help the  agents  (in  itself  a  sensible  way  of  teaching  the  factory  engineers  about  customer  behavior).  They discovered that many farmers left their reapers out in the fields through the winter, ignoring them until the last frantic moment before harvest.  The result was that often crops were ruined by weather or pests because of a rusted bolt or because the poorly set and maintained reaper was damaged in its next use. This led to winterizing instructions and the sale of a lot more protective grease.Repairs and Maintenance.McCormick developed standardized parts, such as wheels, which were used on s e veral  of  his  pieces  of  equipment.  This  enabled  the  farmer  to  cannibalize  his  other  equipment  in  an  emergency  (provided  he  had  also  purchased  other  McCormick  farm  implements),  reduce  the  parts  inventory of his local dealers, and greatly reduce the cost of manufacturing and parts supply.    Distribution  and  Selling.  As  noted  above,  in  the  early  1840’s  local  agents  were  set  up.  Their  contract  required  that  they:  “Maintain  a  sample  machine,  canvass  the  wheat  districts  in  their  territory,  deliver  reapers and instruct buyers on their operation, stock spare parts, be prepared to do repair work and render field  service,  make  reports,  collect  money  due  on  notes,  and  distribute  advertising.  They  often  operated  through  sub-agents,  country  blacksmiths  or  general  storekeepers,” Cyrus  set  up  these  agents  in  the  early  days, then in 1845 he hired his cousin J.B. McCormick to cover Kentucky, Tennessee, and Missouri, and in 1848 three traveling agents were appointed as territorial supervisors of the local agents. The  agent  system  worked  very  well  because  the  local  sub-agents were  guaranteed  payment  because  the  farmer  depended  on  them for other essentials. As  the  railways  penetrated  the  mid-west, McCormick’s traveling agents were first off the train setting up local agents, and because the railways were primarily built to carry cattle to Chicago, this gave McCormick a major break. Many wagons were empty on the return trip so back-haul  rates  to  deliver  farm  equipment  were low, especially at the volume deals that McCormick could negotiate with the railways. This was one of  his  big  cost  advantages  over  his  competition.  Earlier  his  machines  were  shipped  by  boat  and  barge  throughout the canal system that flourished in Ohio, Pennsylvania, and New York from 1830-1850. One of the reasons it took 20 years for his business to start booming was that the transportation infrastructure that opened up the market was not yet in place.

                           Module 1  • What is Marketing?  •  Cases  •  ©Backbone Press 2009                                                                  4Advertising and Publicity Management. Cyrus McCormick was also a genuine pioneer of promotions and advertising. For  example,  From  January  1833 to  January  1835,  McC or mick  placed  105  notices  (free  PR  stories) and advertisements in the Lexington Union. But what is interesting is what was promoted:Hillside Plows              53Threshing Machine            36 Mechanical Reaper              7 At that time Cyrus and his father believed more in their plows and threshing machines. According to one historian, this advertising “campaign” to build the reputation of the McCormick Brand was the first of its kind  in  American  economic  history.  The  advertisements  used  testimonials,  adding  authenticity  to  the  advertising claims.His early 1832-1834 advertising campaign was picked up and given free publicity by the Farmer’s Registerof  Richmond,  Virginia,  the  New  York  Farmer,  and  the  Mechanics  Magazine  of  New  York.  Later, McCormick developed his own magazine, Farmers Advanced that reprinted the latest recommendations for crop  rotation,  fertilizing,  weed  and  insect  control,  and  the  use  of  hybrid  seeds  from  the  Agricultural  Colleges and Stations created by the U.S. Agriculture Service  and the Land Grant Universities. All of this advice  to  his  past  customers  was  very  valuable  and  it  cost  McCormick  nothing  to  fill  its  pages.  He  also  created features where farmers wrote in with their own recommendations and advice as to how to improve farming  processes.  These  columns  were  very  popular.  Liberally  sprinkled  throughout  the  magazine  were  articles on new McCormick farm machinery, order forms, and advertising of other products. At one time, the circulation of this magazine was in the hundreds of thousands. McCormick  first  used  display  advertising  in  the  1840’s,  when  he  had  local  agents  pass  out  illustrations  from his patent application to farmers (see the illustration above). Note the puffery used in the cues:  the horses are sleek, groomed and almost prancing, the man raking the straw is dressed in his Sunday best and a  top  hat! Later  advertising  played  on  the  tremendous  popularity  of  the  equipment, again  using  the  endorsements and behavior of others to encourage laggards to buy. As  far  as  promotion  was  concerned,  in  his  early  days  McCormick  had  no  rivals.  He  encouraged  field  demonstrations on respected local farmers’ property after Church on Sunday. The women folk came by to gossip and to see what their husbands intended to spend their limited resources on. The  men  watched  and  talked  each  other  into  buying  the  new  equipment. Aid  organizations  still  use  a  similar  technique  to  encourage the diffusion of new farming techniques in developing countries. Much has been written about social  influence  in  the  diffusion  of  innovations  in  close-knit  communities;  decades  after  McCormick  understood  the  theory  and  put  it  into  practice.  His  machines  did  not  always  best  his  rivals’,  but  that  mattered  little.  Why?  Because  the  bravado  he  showed  by  publicly  challenging  his  rivals  signaled  confidence  in  the  superiority  of  his  product,  and  only  the  attendees  saw  his  equipment  bested.  Th e advertisements afterwards never told the full story. Sound familiar?McCormick knew his customers and he knew how to put a campaign together. He used Agriculture Shows to display and demonstrate his new equipment and later took his machinery to international expositions in Europe, where his inventions won awards: the equivalent of today’s J.D. Powers Quality Awards. He  di d   this to start up his export sales, which grew considerably from 1870 on, and also to reinforce his reputation back home. Europe was the leader in industrial inventions through the  century, so awards from European organizations or Governments  were  very  prestigious. In fact, an extraordinary story is told of McCormick representatives making several trips to Russia in the 1890’s to set up a manufacturing plant to make reapers and  threshers  to  increase  the  farming  productivity  and  returns  from  the  huge  Russian  wheat  harvest.  Unfortunately, the Czar was not a modernist and believed in the traditional agricultural ways, which led to mass  starvation  only  10  years  later,  and  to  revolt  that  later  culminated  in  revolution.  Who  knows  what  impact  the  early  modernizing  of  the  Russian  farming  economy  might  have  had  on  Russia’s  political  economy? No one can dispute that the early mechanization of American farming had a major impact on the growth of the United States into a super power.   Pricing. McCormick was inno vative in   his pricing in several ways. First he sold his early reapers at a price barely over cost. The idea was to get his product out in use rather than to make a quick killing; penetration

                           Module 1  • What is Marketing?  •  Cases  •  ©Backbone Press 2009                                                                  5pricing  is  what  this  tactic  is  called  today.  Second,  he  introduced  a  standard  price.  His  competitors  often  haggled  over  price  (as  we  still  do  with  cars),  but  the  problem  with  this  is  best  characterized  by  telling  a  story of two neighbors who have just finished working in their fields with their McCormick Harvesters and are  swapping  stories  about  what  a  godsend  their  reapers  are,  but  one  comes  away  from  the  conversation  upset and bitter,  no longer a word-of-mouth promoter of McCormick equipment. Why? He discovered that he paid mor e for his reaper than his neighbor and his neighbor rubbed it in. That is the disadvantage of not charging  a  standard  price. It creates bad will in the haggling and afterwards when buyers have discovered they paid too much. A new risky invention and brand cannot afford such bad will. McCormick  created  a  competitive advantage for himself by standardizing the price early on.  He  also  introduced  term  payment,  an  innovative  idea  that  was  considered  very  risky  at  that  time.  For example, in the early 1850’s his reaper cost $125. The farmer was asked  to  make  a  deposit of $35 plus the freight  from  Chicago. The  balance  was  due  on  December  1  after  the  farmer  had  received  payment  for  his  harvest, with a six percent interest charge on the balance outstanding after July 1 of the next year. To  get  a  sense of the investment the farmer was making, at that time a horse cost about $20 to $30. In practice, the farmer often made a deposit as low as $15 and the balance was collected by the local agent over the next 18 months. McCormick’s credit losses varied from 3 to 5 percent but his margin easily covered this risk. Thi s extended credit required a huge amount of working capital but the firm’s internal earnings were such that it was able to support not only growth in receivables (customer credit), but also a $100,000 loan McCormick  extended  to  Marshall  Field  after  the  1871  Chicago  fire,  to  start  up  his  department  store  business  again.  Furthermore, McCormick’s  early  expansion,  servicing  of  all  of  the  Midwest  and  East,  reduced  his  risk  exposure. If there was a drought or disaster in one part of the country that wiped out the farmers’ revenue, he  could  carry  the  farmers’  debt  in  a  way  that  a local farm supplier could not. Indeed, a story is told that Cyrus  McCormick  visited  Webster  City,  Iowa,  where  all  the  crops  had  failed,  shook  hands  with  all  the  farmers who owed him money, and promised to see them through, winning their loyalty forever.This story has a sad ending. In 1902, during the  time  of  the  great  business  Trusts, International Harvester was  created  by  combining  fi ve  fir ms  including  McCormick.  By  the  late  1940’s  Harvester  dominated  the  farm equipment business with a 60 percent share of the domestic market. However, several decades of ver y bad management ran the company into the ground and in 1984 Harvester sold its farm equipment business. Errors  such  as  conceding  far  too  much  to  unions  for  no  improvements  in  productivity,  getting  into  other  businesses  such  as  marketing  refrigerators,  and  paying  out  90  percent  of  earnings  in  dividends  to  shareholders rather than re-investing  more in the company, contributed; but most importantly the modern managers had none of the inventiveness, drive and management ability of the founder, none of his complex process thinking and political implementation skills.

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