The first lesson every MBA learns is the five P's. The five P's succinctly express the backbone the fundamentals of business. They are:
Entire MBA curriculums have been created that focus on these business basics. Optimization of the business opportunity based on the five P's has been at the heart of successful business around the world for a long time.
Create a constant stream of new products. 3M has perfected this. Lower the price. Ask Wal-Mart about that. Optimize place. Make it easy for your consumer to buy. Among other companies, look at McDonald's with their golden arches on every thoroughfare. Create effective promotions and make more revenue. Everyone from General Motors to General Mills follows this principle. Put a toy in the cereal box. Show the new car with a beautiful model. Make more revenue. Create better packaging. That's what Chiquita bananas did.
The five P's have stood the test of time. In fact, the more a business can follow the five P's, the better. McDonald's, for example, regularly follows all five. McDonald's lowers prices, packages the same product in different and appealing ways, has a very saleable product, conducts a promotion with every major new kids' movie and has a place on all major street corners.
However, along comes the Internet with the "new economy," and the rallying cry is "Down with the five P's." As with all revolutions, there is the proclamation that the old way was just plain wrong. The members of the new economy blatantly state that they have changed the rules and only they know the right way to "new business." Like all revolutionaries, they proclaim their rightness and everyone else's wrongness. There is a smugness and an arrogance to their approach to business.
To the new economists, the five P's are just an old-fashioned business practice. The Internet has changed everything. Go out and hire a new economist, pay him or her a zillion bucks, fire all the old economy business people and become a new economy company. Be hip. Get Wall Street to raise your evaluation to the sky. That's the message we get from the new economists.
While there is no argument that the Internet has certainly changed things, can we assume the five P's are dead? What exactly has the Internet changed and just how much have the five P's changed?
The first thing that the Internet has changed is the ability to identify and have a direct attachment to a customer. Prior to the Internet, the focus was on product and market share. Marketers and product managers focused on how many products were moved, their rate of movement, their acceptance or rejection by the public, the rate at which they were consumed, and so forth. Competition was measured in terms of competing products sold, and marketplaces were viewed as universes where different companies made different amounts of sales. In the old economy, consumers were merely the end recipients of the product and were essentially anonymous.
With the Internet, there is now the opportunity to actually get to know the customer. The horsepower and technology behind the Internet (i.e., data warehouses) make it possible to obtain information about every customer. Telephone companies do it. Grocery stores do it. Insurance companies do it. Airlines do it. In fact, find a competitive marketplace, and you will find businesses getting to know their customers.
With this shift to knowing your customers, there is a shift in what is meant by marketing. In the old economy, market share referred to the number of products you moved versus the number of products your competition moved. In the new economy, market share refers to the percentage of dollars your consumer spends on your products versus the percentage your consumer spends on anything else. AT&T is suddenly competing with Safeway, and Ford Motor Company is competing with a ski chalet in Vail. The whole idea of competition is turned upside down. Now we have dollar competition, and every company competes with every other company at the dollar level. When you can go to the detail level and start to track your customers, you can redefine what is meant by competition and by market share. There is no doubt that the data warehouse and the Internet have made this fundamental change possible.
Along with the ability to reach down to a level of detail never before possible, personalization of sales according to customer is also possible. When we are able to understand the likes and dislikes of our customers, we can approach the customer in a very direct and personal way that was never before possible. We see that our customer buys Faith Hill CDs. When there is a new release by LeAnn Rimes or Shania Twain, let's ask our customer if he or she is interested. When we see that our customer is interested in new furniture, our customer may also be interested in bedding and fine china. We see that our customer has taken a trip to Asia. Let's see if our customer is interested in a tour of Australia, and so forth. Based on what we know about our customer, we can make all kinds of associations.
Furthermore, we can approach our customer through the Internet. Our sales pitch can occur in the wee hours of the morning while our customer is still in bedclothes, just having fired up the Internet to check on yesterday's stock prices. We make the sales pitch directly and conveniently, something the old economy had a hard time doing.
There is another fundamental of business that the Internet has changed. With the Internet, it is possible to actually get inside the head of the consumer. Consider this old economy scenario: In the old economy, a merchant has a display window on Main Street. The merchant displays wares that are both attractive and representative of the products available for sale. Throughout the day, people walk along Main Street and look in the window. Some people merely pass by. Others stop and closely examine the window. Some people are so attracted that they enter the store and make a purchase. Therefore, it behooves the merchant to carefully consider what is displayed in the window. Using experience and intuition, the merchant organizes the display window.
However, does the merchant really know what is attractive? What is unattractive? Does the merchant really know why one person merely glances at the window and another person stops and looks closely? The old economy merchant does not really know what motivates people. The merchant can only make an educated guess. The better the guess, the more money the merchant makes.
The Internet merchant can do better than that. Through careful analysis of clickstream data, the Internet merchant can see what has been attractive and what was not attractive to the consumer. The Internet merchant can see what was selected for purchase but was rejected at the last minute. In short, the Internet merchant can see things about which the old economy merchant simply had to guess. That is one of the great commercial appeals of the Internet.
There is no doubt that the Internet has changed the face of business, but has the Internet rewritten the five P's? The Internet has certainly changed the five P's, but they remain the foundation of business. They just look a little different. There are many ways the five P's have been reshaped. These include:
Products. The Internet and data warehousing technology in support of the Internet has allowed more product information to be made available more cheaply than ever before. A Ford is a Ford is a Ford, but now we can easily learn everything we need to know about a Ford. Manufacturers can now concentrate more on the product and less on reaching the consumer marketplace. As a consequence, there are more and better products. From the consumers' perspective, there are more products to choose from because the Internet makes all products and all product information easily available.
Pricing. One of the interesting applications that has resulted from the marriage of the Internet and data warehouse technology is the ability to perform price-elasticity analysis. With price-elasticity analysis, the Internet merchant can determine the optimal price for a product. In addition, the Internet merchant can perform activities such as yield management where the price of a product varies over time and customers. In short, pricing is an entirely new process with the Internet, but it is still key to making a sale.
Place. If there is one profound change the Internet has made to business, it is in place. Now the consumer can make purchases anywhere and any time there is an Internet connection in the office, in the car, in the home, at night, in the morning, on Sundays, in Pittsburgh. Anywhere. There are more Internet-enabled locations than all the McDonald's, Burger Kings, Taco Bell's, Wendy's and Pizza Huts combined times a thousand.
Promotion. If place has been changed by the Internet, so has promotion. With the Internet and data warehouse technology, the Internet merchant can see what promotions work and what promotions do not. The Internet merchant can see how quickly promotions work and which promotions appeal to what audience. The Internet merchant can measure the effectiveness of a promotion and can offer these promotions directly, cheaply and in a million places all at once.
Packaging. Packaging is packaging. In some regards, the Internet has not changed anything; but it has changed the ability of the Internet merchant to measure the attractiveness of packaging. The merchant can peer into the heads of consumers and find out what packaging appeals to consumers and what packaging does not. To the product manager considering the merits of different packaging options, this quantitative and direct feedback is very valuable.
There is no doubt that the Internet has changed the five P's, but they are still every bit as important. They just have a different form. Perhaps the disenchantment of Wall Street with the new economy (are there any dot-coms out there still listening?) has to do with the revolutionary attitude of the "new economy" advocates. Maybe a little more basic business fundamentals and a little less arrogance are what the new economists need.
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