"I think that your conclusions are correct, Ralph. I'm struck by the singular difference, by the gap in the Marketing/Engineering Investment Ratio™ between the failures and successes. The dichotomy falls right out of the data,"(104) concluded Bob Kern of Hampshire Instruments.
Re-think the early investment priorities. Affect a fundamental shift to a marketing focus, away from a technology focus.
Perform marketing early on, up-front. Assume, for the moment, that the technology will work, and focus on the marketing. The marketing is the big risk. Assume that the technology is not a risk. Having good technology that works is necessary for success. However, having good technology is not sufficient. Every one of the failures in this study had good technology.
For example, Thinking Machines is regarded as having excellent technology. One of Thinking Machines' technologists, Jacek Myczkowski, won three Gordon Bell Prizes for supercomputer achievements. They went bankrupt.
Becton Dickinson's telemetry product was between one and four orders-of-magnitude technically superior, even before Telocate. As one example, their major competitor, HP, had a telemetry transmitter with a range of 100 feet, while BD's unit had a range of two miles. BD's unit had 100 times more range, or two orders of magnitude superiority. BD's technology languished until they raised their M/E Ratio™ over one, whereupon their telemetry sales took off.
Don't be afraid that investing in marketing means less money for engineering.
Nevins' data [for established companies] shows identical R&D investments in companies with a marketing focus and in those with a technology focus [as a percentage of sales]. He went on to conclude, "R&D differences between [all other] and marketing-focused strategies tend to be relatively small ... illustrating that it is the marketing expense, coupled with ... R&D focused on a few high-value tasks, that support higher margins."(105)
Logically, successful high-growth enterprises tend to hire engineers, and to grow their engineering capability. For example, Becton Dickinson Medical Systems raised their M/E Ratio™ to four, and had to significantly expand their engineering staff to handle the success.
The real anxiety ought to be a fear of layoffs. Before BD raised their M/E Ratio™, between layoffs, and engineers who left in disgust or because there was no money for raises; BDMS was reduced to one degreed engineer. GCA employed 3,000. They are all gone now. Hampshire Instruments had a $12 million per year engineering budget. Hampshire ran out of money for engineering, or anything else, and shut their doors. KSR had more than 100 people in their technical staff alone. KSR went bankrupt. Thinking Machines laid off 200. Varian Associates laid off their entire IMPATT oscillator group, including this author.
What kind of organization would you like to be part of? The choice is yours.
for Venture Capitalists
Use M/E Ratio™ as a test of whether to invest. If the business plan demonstrates that the cumulative Marketing/Engineering Investment Ratio™ is already more than one, proceed to consider the other issues that you normally would. If the M/E Ratio™ is less than one, then either put money in earmarked for marketing, or introduce the applicants to potential marketing team members, or encourage them to find marketing people themselves.
When you do decide to invest, incorporate the M/E Ratio™ into the terms as a financial covenant. Maintain the M/E Ratio™ above one.
As a CFO who had to raise money from investors, Bob Kern made the connection, "Your findings are right on the mark. Your findings are just very important for investors, and for startups. The investors will control the startups. Those who control the purse strings will make the entrepreneurs jump."(106)
Monitor the M/E Ratio™ as a key financial Ratio in portfolio companies. If the M/E Ratio™ falls below one, raise the M/E Ratio™ above one.
Use the M/E Ratio™ as a tool to revive the "living dead" companies that are in every venture capitalist's portfolio.
Account for marketing distinctly from promotion and selling.
As one venture capitalist, Gordon Baty of Zero Stage Capital, observed recently, "The Vice President of so-called Marketing at one of my 'living dead' companies thinks that he can 'market' his way out of their problems with just one more slick brochure. [He's thinking about promoting, rather than about upstream marketing.] He needs a lot more than that!"(107)
for established enterprises and corporate America
Make a major shift in funding to real marketing.
There is no difference in the data of Figure 1 between startups and established companies. Successful established companies also invest more in marketing than in engineering. For example, Becton Dickinson made a major shift in funding, raising their M/E Ratio™ to four.
Observing failures and successes in established companies, Nevins concludes, "Successful companies think of marketing as the essence of strategy rather than as a sales and advertising function. The shift in spending decisions [toward up-front marketing] and control systems [accounting separately for promoting and selling] is the single most common roadblock to achieving marketing excellence."
Re-structure and re-organize to be marketing directed, from the top down. Change people.
Nevins tells of the structural and personnel challenge, "Perhaps the most difficult task faced by senior managers is creating a management team infused with [upstream] marketing expertise. Most traditional electronics companies' marketing departments lack key [market research] skills such as analyzing customers ... Without personnel or organizational changes, additional 'marketing' dollars often are spent hiring staff who are diverted into sales or sales-support activities. Changing people and organizations is often the only feasible approach."(108)
Becton Dickinson brought in a new management team for the Medical Systems Division in 1977. The new Division President had a marketing background. They recruited staff who possessed distinct upstream marketing skills, tools, and experience; and who proceeded to rigorously apply formal market research methods.
Varian Associates changed. The Varian Division Manager who reported an M/E Ratio™ of four on a 1993 project said, "We're not the same company that we were in 1969. We have new management leading us to be marketing directed from the top down."(109)
Think in terms of dynamics. Imagine your business as a series of intrepreneurial startups. Abandon the operating ratio philosophy.
Time defines marketing, just as much as a functional demarcation does. Marketing and engineering are executed in the period before the product is ready. After the product is ready come promoting, selling, and manufacturing (operations). Review Figure 3, which pictorially places the various functions in time. There is no marketing or engineering, by definition, during manufacturing operations of any one product. The marketing and engineering for that product took place at an earlier time, during the design phase of that product while there were not yet any operations for that product. (Realistically, there is some sustaining engineering and marketing work, but they are small relative to the original efforts.)
In established companies, product generations normally overlap; the engineering and marketing for the next generation occur during the current generation's manufacturing operations. It makes no sense to calculate marketing as a current operating ratio, because marketing (for the next generation product) is not related to operations for the current generation of product. Marketing for the next generation product is related to operations for the next generation product, of which there are now none.
Officers of certain established companies with little or no current marketing have pointed this author to their current operations, suggesting that little or no marketing is necessary.
However, they would not suggest that little or no engineering (for the next generation product) is necessary. Technology-based business people recognize that, with little or no engineering, they would shortly be run over by the competition and by evolving technology. Furthermore, they really did do marketing for the current product. However, that was in the past. They either don't remember it, or didn't separately account for it.
Engineering budgets are scaled to the next generation product, as marketing budgets should be. Together, marketing and engineering form an intrepreneurial startup dynamic.
Get visibility. A startup normally has, by definition, only one project. However, established corporations tend to have a number of business lines. Like industry averages, a corporate rollup can mask what's going on. "Often, the issue of better marketing gets buried in a forest of ... data. A useful first step ... involves segmentation of the market."(110) Get visibility by separating divisions, market segments, projects, products, and product lines.
Any established company surely has some pieces that do less well or fail, and some that do better or are super successes. Track the winners and the losers, separately. Do NOT aggregate marketing investment. Do not aggregate engineering investment. Calculate the M/E Ratio™ for each, separately.
for Finance and Accounting
Finance the marketing, not just the engineering. Finance the marketing at the same level, or higher, than the engineering. Finance the marketing early on in the investment cycle. Insist upon (demand) customer and market data from up-front marketing to justify the financing of investments in engineering.
Account separately for each of marketing, promoting, and selling. Include the marketing function done by people without marketing titles, such as company management.
Abandon the present "marketing department" cost structure, which often lumps marketing, promoting, and selling together into one department. Each separate function is valuable. However, you can't tell how much is devoted to each. Selling and promotion are normally large. As a consequence, marketing can lose visibility.
Abandon marketing as a cost center. Consider promoting and selling as a cost center for existing products.
Account for marketing as an investment in new products, just as engineering is considered an investment in new products.
for SBIR - financed firms
SBIR programs do not allow explicit marketing charges, but DO allow "identification of technical specifications." This is still a marketing function. If you wish to be commercially successful, obtain funds for marketing, from this method, or from outside investment.
for the SBIR program
The SBIR Re-authorization Act of 1992 contains a Congressional mandate for demonstration of commercial viability. It has been helpful, but doesn't go far enough. SBIR recipients are encouraged to partner with established firms, who don't necessarily understand marketing. Technical evaluators (with no marketing credentials) evaluate SBIR proposals for both technical and commercial viability. This list is a proposal for changes to the SBIR program:
for defense conversion
For defense contractors, to "convert" means to master commercial products. The evidence indicates that, to be successful in commercial products, you must invest more in marketing than in engineering. However, this philosophy is foreign to the culture of defense contractors. Nothing less than a radical re-structuring will work; a cultural upheaval to a marketing focus.