FORMER AMA CHAIRMAN PENS “WHY SMART COMPANIES DO DUMB THINGS” – HOW TO DOUBLE THE BOTTOM LINE BY AVOIDING 8 COMMON BLUNDERS IN NEW PRODUCT DEVELOPMENT

NEW YORK, September 2007 -- In “Why Smart Companies Do Dumb Things” (Prometheus Books, ISBN 978-1-59102-568-9), a book to be published this fall, former American Marketing Association chairman Calvin Hodock maintains that American companies can easily double their profit by cutting the failure rate of new products, currently 90 percent.

Hodock identifies the eight most common fatal mistakes American business makes in launching new products.  He then offers seven reasons why these innovation blunders persist and flourish, followed by suggestions for shareholders, CEOs, and business schools on how to cut the failure rate.

In his “Peter Principle” for the 21^st Century, Hodock writes that the cost of failure is borne by shareholders as plunging stock prices and by the public in lost national income, lost retirement savings, and vanished jobs.  Examples include Polaroid, where missed opportunity and questionable accounting cost the jobs and retirements of thousands, and General Motors, Ford, and Chrysler, where failure to build cars people want has spread unemployment throughout the American Midwest.  He maintains that innovation is the engine of America’s growth, and that the engine is in real danger of stalling unless business people learn from their mistakes.

Hodock, erstwhile marketing executive at consumer product companies such as Johnson & Johnson, Gillette, and Bayer, is now a professor of marketing at New Jersey’s Berkeley College, adjunct professor at New York University, and guest lecturer at the University of Pennsylvania’s Wharton School.  He examines 400 product failures to make his case. 

The eight recurring errors he found are:

1)  Marketing Misjudgment:  Companies stray from their core competency.  Examples include a magazine from clothier Banana Republic and calculators from razor maker Gillette.

2)  Positioning Poison:  Misrepresenting the product to consumers. Examples include Bayer Select. It degraded the Bayer Aspirin name with a product line which duplicated those of its competitors, Tylenol and Advil, as well as its own.

3)  Dead on Arrival Product:  Think of the Pontiac Aztek, possibly the ugliest car ever, and Vioxx, a pain reliever with the potential to cause heart attacks.

4)  Competitive Delusion:  Underestimating the competition.  Johnson & Johnson’s “Purify” denture cleanser took on market leader Efferdent, which buried Purify in a take-no-prisoners retaliatory marketing campaign.

5)  Defective Marketing Research:  The “New Coke” was developed using a taste test biased in favor of arch-rival Pepsi.  Based on the tests, Coke changed its 100 year old formula to be more like Pepsi.  Faced with a consumer uproar, Coca Cola reversed itself within weeks – at the cost of a quarter of a billion dollars.

6)  Fatality in Frugality:  Cutting corners kills a new product.  Consider General Electric’s $450 million pretax charge for a failed refrigerator compressor.  They had never field tested it.  Frito-Lay, famous for its potato chips, saved a million dollars entering the cracker business by foregoing extensive product testing.  The $1,000,000 Frito-Lay saved on testing cost it $100,000,000 when their crackers failed to sell.

7)  Timetable Tyranny:  In the rush to be first companies can misjudge the market.  That’s how Motorola fell into the Iridium phone hole – a $3,000 bulky, satellite phone device that competed with sleek, $100 cell phones.  It never sold more than 10 percent of what it needed to break even.

8)  Marketing Dishonesty:  Pepsi ignored focus groups who hated the taste of “Crystal Pepsi.”  They forced it through their distribution system.  When is the last time you saw Crystal Pepsi on the store shelves?

Hodock identifies seven reasons why these innovation blunders flourish. 

1)  The Curse of Me-Too:  The new product may be too similar to an established brand. 

2)  Marketing Kindergarten:  Corporations have relied too much on fresh MBAs to run their marketing programs.  While they excel in quantitative analysis, the liberal arts graduate is often better suited to the earliest stages of product development, which Hodock characterizes as “an unstructured journey through the forest of discovery.”

3)  Marketing Waltz of Musical Chairs:  By the time a new product is pronounced dead, the marketers behind it have often moved on to new assignments.

4)  The No-Bad-News Syndrome:  Bad news is ignored or rationalized away.

5)  The Comatose Board of Directors:  Enough said.

6)  Marketing’s Freudian Id:  Marketing is the “Id” of business.  It needs to be checked by science and research, and ultimately the board of directors (the corporation’s ego and superego) to be kept on track.

7)  CEOs Need Short-Term Results:  Citing Warren Buffett, Hodock maintains that “companies are willing to sacrifice long-term shareholder value to hit unrealistic earnings targets.”

“Why Smart Companies do Dumb Things” ends with tips for shareholders, corporations, and business schools.  They include:

• Shareholder Activism.  Shareholders cannot be passive.  Challenging a bad management has become much easier thanks to internet communications.
• Have the board of directors audit innovation in the same way that they oversee finance, nominations, and compensation -- via an outside committee.
• Look behind the PR hype surrounding the CEO – the more of it that there is, the more likely the CEO is to be a failure.
• Follow Gillette – avoid quarterly predictions of future earnings.  It’s a fool’s game.
• Mingle with the troops and customers:  CEOs and directors need to eat in the cafeteria and visit the shop floor and stores often.
• Challenge assumptions behind profit and loss predictions for new products. 
• Stamp Out Marketing Amnesia.  The lessons of innovation blunders are there to be learned by anyone who looks for them, but most don’t look.
• CEOs should embrace corporate skeptics rather than surround themselves with “yes men.”
• Practice corporate ethics.  Sweeping bad product news under the rug can be more costly than embezzlement, and it is just as unethical.  Citing a survey that says 52 percent of MBA students would buy stock illegally on inside information; Hodock suggests that business schools need to emphasize ethics training far more than they now do.
• Business schools need to teach humility, not attitude.