Marketing Institutions: A Core Focus of the Founding Fathers of Marketing (1912-1925)

1. Marketing Institutions: A Core Focus of the Founding Fathers of Marketing (1912-1925) Presentation for Special Panel: “The Study of Marketing Institutions: Ramifications of its Current Status on the Future Direction of Marketing” Academy of Marketing Science Annual Conference, May 15-19, 2012, New Orleans, Louisiana Bert Rosenbloom Rauth Professor of Marketing Management Drexel University

2. Marketing Institutions • Recognized from the start of the marketing discipline • Explicitly and extensively discussed in the early literature • Viewed as a major force in marketing • Seen as dynamic and adaptable • Responsive to technological, economic, and behavioral dimensions • Worthy of study

3. The Concept of Heterogeneity of Demand “Demand emanates from man and that man is a bundle of habits, whims, fancies, prejudices, likes, tastes, willfulness, and vagaries. Upon such an unstable foundation every market rests.” Source: Duncan, C.S., Marketing: Its Problems and Methods, New York: D. Appleton and Company, 1920, p. 43.

4. The Concept of Maladjustment between Production and Consumption “The conditions which have served to render complicated the task of distributing merchandise include practically all of the economic developments and social changes involved in what are commonly referred to as modern conditions of life. Thus, increases in the scale of production introduce maladjustments between production and consuming units.” Source: Cherington, Paul T., The Elements of Marketing. New York: Macmillan Company, 1920, pp. 2-3.

5. Dimensions of Maladjustment “Goods produced in large quantities cannot be produced exactly in the quantities and the precise time in which they are to be consumed; nor is their accurate adjustment which exists with regard to quality [variety] of the goods produced. Moreover, the place of production may not at all coincide with the place of consumption.” 1)Quantity, 2) Variety, 3) Time, 4) Place Source: Cherington, Paul T., The Elements of Marketing. New York: Macmillan Company, 1920, p. 3.

6. The Maladjustment Curve (implied) *Degree of Maladjustment Degree of Heterogeneity *Between aggregate production and aggregate desired consumption

7. Question How can maladjustment between aggregate production and aggregate desired consumption be reduced? Answer: By performing marketing functions.

8. The Functions of Marketing (1917)* It was Weld who first specified what he termed “functions of marketing”: 1. Assembling 5. Rearrangement 2. Storing 6. Selling 3. Assumption of risk 7. Transportation 4. Financing Source: Weld, L.D.H., “ Marketing Functions and Mercantile Organization, American Economic Review, June (1917): 306-30.7 *In 1912 Arch W. Shaw referred to “functions” but as “functions of middlemen.” (see Shaw, Arch W., “Some Problems in Market Distribution,” Quarterly Journal of Economics, Vol. 26, no. 4 (1912): 703-765.

9. Other Lists of Marketing Functions Soon Followed Vanderblue, for example, proposed the following list: 1. Assembling 6. Assorting 2. Buying 7. Risking 3. Financing 8. Selling 4. Standardizing 9. Dispersing 5. Storing 10. Transporting Changes from Weld: • Buying added • Rearrangement divided into two separate functions of assorting and standardizing • Dispersing added as a new marketing function Source: Vanderblue, Homer B. (1921), "The Functional Approach to the Study of Marketing," Journal of Political Economy, 29 (October): 676-683.

10. Question Given that marketing functions must be performed to reduce maladjustments between aggregate production and aggregate desired consumption, who performs the marketing functions? Answer Marketing Institutions – especially “middlemen”

11. Marketing Institutions Derive from Marketing Functions “Institutions are organized for the purpose of facilitating the performance of certain functions. The character of the service determines the type and character of the institution. The service or function is therefore more fundamental.” Source: Duncan, C.S., Marketing: Its Problems and Methods, New York: D. Appleton and Company, 1920, p. 9.

12. The Concept of the Marketing Institution “There are certain types of organizations or certain types of institutions through which men work to accomplish a desired end. The process of distributing goods is the process of men working through certain mechanisms and devices which they have developed and which make their work most effective. The mechanisms and devices are the institutions. Distribution like production has its machinery.” Source: Duncan, C.S., Marketing: Its Problems and Methods, New York: D. Appleton and Company, 1920, p. 316.

13. The Middleman as a Marketing Institution “The middleman is the outstanding figure in modern marketing not because he has consciously set out to make a place for himself nor because consumers have blindly permitted him to come between them and the manufacturer of the things they buy. It is because he has been forced into existence, on the one hand by the necessities of specialized and large scale industry, and, on the other hand by the necessities of consumers equally specialized in their activities and constantly demanding more and more in the way of services which the distant manufacturer most usually rely upon the middlemen to give.” Source: Butler, Ralph S., Marketing Methods. New York: Alexander Hamilton Institute, 1917, p.14

14. Evolution and Change in Marketing Institutions “At the outset it must be kept clearly in mind that a trade organization [marketing institution] is not a fixed or a permanent thing; the existing organization is not the best or the worst possible, but is an attempt to do a required service effectively.” Source: Duncan, C.S., Marketing: Its Problems and Methods, New York: D. Appleton and Company, 1920, p. 61.

15. Evolution and Change in Marketing Institutions (Cont.) “[One should realize] the absurdity of assuming that any particular form of distributing mechanisms can be permanent under conditions in which both production and consumption are undergoing radical change.” Source: Cherington, Paul T., The Elements of Marketing. New York: Macmillan Company, 1920, pp. 193.

16. Effectiveness and Efficiency are the Main Drivers of Institutional Change • Effectiveness refers to the degree of success experienced by institutions in performing marketing functions • Efficiency refers to the minimizing of costs of performing marketing functions “If the system [set of marketing institutions] is effective, but costly, it is inefficient.” Source: Clark, Fred E. (1921), "Criteria of Marketing Efficiency," American Economic Review, 11 (June), 214-220.

17. Effectiveness and Efficiency are the Main Drivers of Institutional Change (Cont.) “In the long run the success of any marketing device [institution] depends directly on the degree to which it performs the necessary marketing functions without waste.” Source: Cherington, Paul T., The Elements of Marketing. New York: Macmillan Company, 1920, pp. 193.

18. Propositions Relevant to Marketing Institutions Derived from the Seminal Marketing Literature • Marketing is a process in society which exists to reduce maladjustments between aggregate production and aggregate desired consumption. • In order to facilitate adjustment between aggregate production and aggregate desired consumption, marketing functions must be performed. • The marketing system in society consisting of various institutions emerges and evolves to perform marketing functions. • The effectiveness and efficiency in performing marketing functions by the institutions comprising the marketing system determine their survival and hence the institutional structure of the system as a whole.

19. Conclusion • Research that focuses on marketing institutions and particularly on how and why marketing institutions emerge, change, rise, and fall is not only interesting, but also potentially of real practical value

20. For Example: • New online marketing institutions vs. “old fashioned” marketing institutions Question Shouldn’t the marketing discipline be the main source of leading-edge thought and research on the metamorphosis occurring in these marketing institutions?

21. Specific Practical/Managerial Example How about the phenomenon that has recently been called: “Showrooming” This phenomenon poses a potentially mortal threat to one of the most dominant type of marketing institutions of the past 30 years: “Big Box Retailing”

22. Question What theories, models, or research does the marketing discipline have to offer to an iconic “big box” retailer such as Best Buy that could provide this retailer with some insights into the institutional dynamics that underlie the phenomenon of showrooming and what might be done strategically to deal with it? Answer Practically nothing!

23. Q&A?