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Regulation of certain industries was a tradition in the United States for almost a century. The Interstate Commerce Act was passed in 1887 to regulate interstate rail freight rates. Congress intended to reduce or eliminate price discrimination between small and large shippers and to maintain an incentive for transportation companies to provide service to rural areas. Other industries have also been the focus of regulations regarding services and charges, including communications, banking, petroleum products and natural gas, electrical utilities, interstate trucking, and airlines. But over the past several years, federal regulation in many of these areas has been reduced or eliminated. The initial result has been the elimination of monopolies and the restoration of price competition.

Deregulation enabled new companies to enter these markets and created competition in wages between union and nonunion sectors of the industries. To this point, labor has been most affected by deregulation in trucking and air carriers in the areas of wages and employment.

“If all the earth’s economists were laid end to end, they could not reach an agreement,” or so the saying goes. Politicians and reporters are fond of pointing out that economists can be found on both sides of many issues of public policy making. If economics is a science, why do economists quarrel so much? After all, physicists do not debate whether the earth revolves around the sun or vice versa.

The question reflects a misunderstanding of the nature of science. Disputes are normal at the frontier of any science. For example, physicists once did argue, and quite vociferously, over whether the earth revolves around the sun. Nowadays, they argue about antimatter, the “big bang,” and other esoterica. These arguments go mostly unnoticed by the public because few of us understand what they are talking about. But economics is a social science, so its disputes are aired in public. All sorts of people are eager to join economic debates about inflation, pollution, poverty, and Los Angeles road network, the map makers have produced a map that is oversimplified for our purpose. Too much has been assumed away. Of course, this map was never intended to be used as a guide to the La Brea tar pits, which brings us to an important point:

There is no such thing as one “right” degree of abstraction for all analytic purposes. The proper degree and need of abstraction depends on the objective of the analysis. A model that is a gross oversimplification for one purpose may be needlessly complicated for another.

Many things are managed in life, such as emotions, time, money, talents, and of course, taxes. One thing that financial planners help their clients manage is risk. There is a potential for significant financial loss if the concepts of risk management are ignored. It would be truly pathetic to see a client’s hard-earned net worth fall apart because of improper risk management.

Obviously, it is impossible to plan for every potentially damaging situation. However, there are categories under which loss can be defined and quantified: death, disability, health, accident, casualty, and liability. It is in these areas that planners must operate.To manage risk, there first must be an awareness of it. The type of loss must be definable and manageable. Second, the magnitude of a risk must be known, as well as the degree and extent of potential damage. How costly can it be? Third, various methods of managing risk must be reviewed to determine which are most appropriate.

The ultimate goal, of course, is to control risk. If control is impossible, then determining the best way to manage risk is essential. The following techniques help clients reduce the risk of loss.

Avoid Risk Refraining from doing certain things can minimize risk significantly.

Reduce Risk Clients can lessen risk by taking specific precautionary steps.

Retain Risk Full responsibility for a loss is assumed. This is the concept behind self-insurance where people use their own funds to cover any loss rather than purchasing insurance for insurance liability. Caution must be exercised when utilizing this technique, because inability to pay for the loss could be disastrous. Also, the potential frequency of loss must be considered to determine whether this technique is feasible.

Transfer of Risk In this instance, the risk is shifted to another. This frequently happens when waivers of liability are signed, for example when going on a rafting trip or for children on a Scouting expedition. However, the most frequent method of transferring risk is to purchase insurance.

Insurance minimizes or eliminates a financial loss due to the uncertainty of future events. However, not all risks are insurable.

Are you familiar with the Law of the Situation? It is a term coined in 1904 by Mary Parker Follett, the first management consultant in the United States.
Her client was a company that thought it was in the window shade business.
But she persuaded them that they were actually in the lightcontrol business. By expanding their concept of what kind of business they were in, she was able to help them expand their business. “What business are you really in?” is the fundamental question posed by the Law of the Situation. Every company selling to the public can and
must broaden its answer to the question even more than Mary Follett did for the window shade company, for even to define their mission as “light control” may have limited their thinking and opportunities. For example, draperies, like window shades, are a form of light control. Matching bedspreads have nothing to do with light control. Yet bedspreads might be a popular and profitable item to promote to the end-users of your draperies.

The New Revised Law of the Situation

Today the real answer to “What business are you really in?” is that you are in the customer development business. And the sooner your company comes to that realization-the sooner it casts off the shackles of a narrower definition-the sooner it will be free to expand in surprising new directions.

What is a mint doing selling leather-bound books? What is a giant bank doing selling refrigerators? What is a radio station doing selling tours to listeners? What is a distillery doing selling long underwear?

They are applying the New Revised Law of the Situation: namely, that the business you are in is making money any which way you can through developing a continuing, profitable relationship with the buyer of your product or service. And these companies are applying the Law by joining two powerful marketing assets, share of market and customer database.

How We Define Share of Mind

We want to call it “share of market” rather than “share of mind.” What is the difference? In our definition, share of market measures the breadth of your market penetration, but share of mind measures the depth.

For instance, you might have a 17 percent share of the facial-tissue market because your product is the cheapest. Your share could start melting away overnight if a competitor seriously undercut your price. But Kleenex tissues has a share of mind. It has been an old, familiar, comforting friend through laughter and tears, opening nights and last rites. It has a share of mind that can resist price competition.  When Coca-Cola tried to abandon old Coke soft drink, they found that it too had an impressive share of mind not revealed by market share figures or their costly research studies. In the past, this share of mind might have seemed a vague, unmeasurable asset, but now a price tag can be-and has been-put on it. When Philip Morris moved to acquire General Foods for $5.8 billion. About $2.8 billion of that represented not physical assets but good will. As one stock analyst pointed out, “If you had to go out and create a brand like Jell-O, it would cost you a lot more than what Philip Morris is paying for it.”

There is an old Latin saying, Qui non proficit, deficit. In marketing, the opposite is also sometimes true: If you’re not losing the customers you already have-if you can maintain and deepen their loyalty-that can be a victory.
The AT&T Opportunity Calling catalog should really be classified as a customer loyalty program rather than a sales stimulation program. Its purpose is to keep you from switching to another long-distance phone service, not to stimulate you to make more long-distance calls. When the government deregulated phone service, it mandated free and equal competition among companies offering long-distance service. But canny old Ma Bell got the jump on her young whipper-snapper competitors by launching this massive rewards program.
In a stroke of genius, AT&T decided to offer handsome rewards which wouldn’t cost them anything and wouldn’t require any warehouses and shipping facilities for handling merchandise. They found the answer in negotiating rebates and discounts they could offer on brand-name products and services widely available at retail. And apparently it was easy to find plenty of product and service companies eager to participate-it gave the latter a chance to make powerful sales promotion offers to 22 million residential phone customers at no advertising cost.
Within 2 years after the program was launched, the response rate per catalog had edged up to 5 percent. AT&T had built a mighty defense, backed by a $100 million promotion budget, against attempts by Sprint, MCI, and the other long-distance companies to steal their customers in the government-mandated free-for-all competition. AT&T had issued 3 million certificates and checks with a face value of $50 million. Some 50 percent of the eligible customers in their database said they had used the program or intended to.
What descriptive name should be given to this new kind of marketing. Is it sales promotion? Is it direct marketing? It is neither and both. We prefer to call it MaxiMarketing.
Another way you can sustain customer loyalty through your customer database is to set up a program which will frequently repromote your company’s image and positioning-and, ideally, to get your customers or other advertisers to pay for it.
Olin Corporation, whose products include pool-care chemicals, publishes an annual magazine called Poolife and mails it to 1.2 million swimming pool owners. An important source of names is letters or calls to Olin for information on product rebates or services.
The magazine contains articles on water care and pool maintenance as well as features on swimwear, computer programs for pool care, food and entertainment ideas. In addition to promoting Olin products, the magazine carries paid advertising by other companies wishing to reach pool owners.
We don’t know whether the paid advertising is enough to cover the entire annual expense of $300,000 or so, but, according to a spokesperson, “Advertiser response has been terrific.” So any way you figure it, Olin comes out pretty well.
Your customer loyalty promotion to your database can also be financed and justified by its encouragement of future purchases of the same or a better product.
Prince Manufacturing Company, makers of Prince tennis equipment, publishes a quarterly magazine called Prince and mails it free to 150,000 requesters. They launched it by sending a test issue to 60,000 in-house names, who were asked to return a postcard if they wished to receive further copies. Some 54 percent returned the cards. Since then additional names have come in from purchasers of Prince racquets who send in the hang tag placed on each racquet.
Each issue includes an interview with a top tennis pro and a guest column of tips from a noted tennis coach. But it also keeps the subscriber aware of the Prince brand name and product line, including new and higher-priced rackets, so that Prince will be favorably positioned in the subscriber’s mind when the customer’s old racket wears out.
Dierberg Food Stores of St. Louis has provided a striking example of how retailers can promote through a customer database and get others to pay most of the cost. This nine-store chain maintains a database of 150,000 customers. Four times a year it sends them a beautiful 12-page magazine of recipes, the Customer Club News. Bound into the center is an envelope of money-saving coupons, some of them cents-off coupons redeemable at Dierberg stores, others coupons by other local merchants and restaurants who pay for the privilege of being included. This outside advertising plus co-op ad money from food manufacturers pays most of the cost of printing and mailing the magazine.

Williams-Sonoma, a housewares and cookware intermediary, is a particularly fascinating case. It was a retail store, which spawned a major mail-order catalog operation, which in turn spawned a chain of retail stores.
The company was started around 1955 by Chuck Williams, who bought an old hardware store in Sonoma, California, and turned it into a gourmet cookware and housewares shop. Later he moved it to San Francisco, where he called it Williams-Sonoma so his old customers would know his new store was run by that same Williams fellow from Sonoma. After a couple of decades, he found he had accumulated customer database of about 10,000 people who had bought from his store but who lived outside the San Francisco area. So he created his first mail-order catalog. Soon, of course, he began mailing the catalog to outside lists as well.

This created a nationwide demand for his unique merchandise which not only boosted his store sales in San Francisco but made it possible to open other stores. By 1983 he had 11 retail outlets. By 1985 the number had risen to 19. And the sales volume rose accordingly, from about $4 million in 1979 to about $40 million in 1983!

What makes the Williams-Sonoma story especially significant is that it is one of the few cases we could find where an effort has been made to measure the effect of catalog circulation on store sales. Here is the report of Pat Connolly, vice president for mail-order sales, in a panel discussion in 1982:

The mail-order business comprises more than half of our business right now, but each of the stores has registered impressive growth gains because
of the catalog, a growth rate about 30 per cent per store. In one of our stores, we increased the sale 300 per cent in four years. This was a store that
was in existence for six years before we started to promote it. Then in our San Francisco store we more than doubled the sales in three years, and that
store had been there for 22 years.

We’ve always tried to measure the excess store sales that result from
catalog mailings. If you have a store and you’re mailing catalogs, it is very difficult to really know how much benefit you’re getting in the store from
the catalog. You know that sales go up, but you’re really not exactly sure to what extent the catalog is responsible.

This summer we did an extensive study looking at results that we’ve had for the past three years. We found that in our business we can get about a
30 per cent lift if we mail our catalog in a store area. That’s 30 per cent additional incremental sales in the store.

Another important discovery the company made was that the completion curve of the resulting store sales was the same as that of the catalog
sales.That’s important news to retailers who may not realize that one of their catalogs or flyers can still be generating retail sales in their stores a month or two later.

Williams-Sonoma carries about ten times as many items in the stores as they do in their catalog-but every item that is in the catalog is also in the stores. To reap the full retail rewards of a catalog-store mailing, make sure that your stores are well-stocked with all the catalog merchandise. Otherwise a customer who visits a store seeking to buy a particular catalog item may simply turn away in disappointment and leave if the store is out of stock. And Connolly points out, “In mail order you can back order, although it’s very painful. In retail when the customer leaves, you’ve just lost the sale.”

One final important point: The names collected from people who visit the store prove to be an extremely productive catalog mailing list, better than most outside rented lists. Points out Connolly: “They’ve had a pleasant experience with the store; they’re familiar with the quality of the merchandise, and this experience breaks down the resistance to mail order that they may have had.”

For some reason, the Williams-Sonoma catalogs we have received list only the cities in which they have retail shops, not the street addresses as well.
The Sharper Image is sharper in this respect. One of their recent catalogs devoted three-fourths of the entire back page to a prominent listing of their stores, including their addresses, and a strong pitch for the retail trade:

Stores To Satisfy Your Curiosity

As soon as you step inside the door of a Sharper Image Store-you know you’ve entered a magical place.
Because in our store all the ingenious products The Sharper Image is
known for are out in the open-waiting for your touch. Test out and try anything that attracts your curiosity-in a relaxed, unhurried atmosphere.
One cannot help wondering if this stronger pitch for a store visit does not result in incremental store sales even greater than Williams-Sonoma’s 30 percent-without subtracting anything from the catalog sales.

Laura Ashley, Inc. is a spectacular example of the potential of database-powered multidistribution by a combination originator and intermediary company. This British-based manufacturer-retailer of home furnishings and women’s apparel, with around 200 stores internationally, grew an average of 46 percent annually between 1975 and 1985, when it achieved a worldwide sales volume of $150 million. About half of this volume was accounted for by its U.S. operations.
The company was started around 1955 by Laura and Bernard Ashley. She began designing prints for tea towels, and he built a very simple screen-printing device on their kitchen table. Gradually they developed a wholesale business selling their own scarves, towels, and home furnishing and accessory items to U.K. department stores.

Next they opened their own store to showcase their collection and found they liked the retail business better than wholesale. So by 1963 they had abandoned the wholesale business and were concentrating on opening up retail shops in the United Kingdom.

One thing that made their operation unusual from the beginning was their decision to retail only products of their own design and manufacture. Even today this is true of 90 percent of their product line.

Laura Ashley entered the U.S. market in 1974 and within 10 years had established 63 stores and built an annual sales volume of $70 ~million.

A key ingredient in this meteoric success was their building of a catalog customer database and the constant interplay between catalogs and stores. When they decided to open a store in Denver, for instance, they were astonished to find that they already had 9000 customers concentrated in a small area of the city. It didn’t take much additional promotion to make the store they opened in that area an instant success. And they are able to use their catalog customer database in this way to identify promising locations for the 15 new stores a year they plan to add.

Their central database at their U.S. headquarters in Carlstadt, New Jersey, captures and retains three kinds of records: people who have ordered a catalog from a direct-response magazine advertisement, people who have ordered from a catalog by mail or phone, and people who have purchased in a store. Presumably this makes it possible to track the efficiency of a magazine advertisement even in terms of resulting store sales as well as mail and phone catalog sales.
Although new fashion catalogs are automatically mailed free to the entire database (and the more expensive home-furnishings catalog is given to their best customers), they are also able to sell a great many copies. The stunning beauty and quality of the catalogs make people willing to pay for them, and the fact that they have paid means that expensive catalogs are not wasted on uninterested prospects.

They sell the home-furnishings catalog for $4 in their shops and also sell some 100,000 copies in bookstores around the country. They also successfully tested selling their fashion catalog in bookstores for $2.
Their direct-response ads in magazines offer a catalog “subscription” (actually eight catalogs within 2 years) for $5. They expected to sell 85,000 to 90,000 catalogs this way in 1985.

They laughed at the line in the Newsweek story about them which said that their remarkable growth has been achieved “with little or no advertising.” That mistaken observation bespoke a common misunderstanding of the value of a store catalog as store advertising.

Their customer database was around 500,000 at the beginning of 1985 and was growing at the rate of 50,000 names a month.
Remember Chapter 10’s discussion of how to clone your best customers? Apparently Laura Ashley is seeking to do just that. In an interview in the beginning of 1985, their vice president for U.S. marketing, ,Jim Frain, said:
We’re looking at the customer base that we have been developing, and finetuning the demographic profile in very local neighborhoods all around the
country. So what we’re working on very painstakingly right now is precisely identifying those neighborhoods within a ZIP code and whether they’re
subscribers to certain magazines and customers of certain stores.

Translation: We’re identifying neighborhoods with the highest concentration of grade-A Laura Ashley customer clones, so that we can distribute catalogs and open stores in those neighborhoods. This is the synergistic promotion and distribution of the future.

Royal Silk is another success story of an entrepreneurial young company which found, like Laura Ashley, that some people are armchair shoppers and some need to touch the merchandise before buying. Pak Melwani founded the company in 1978 to sell exclusive, affordable, imported silk garments for women by catalog. Within 7 years he was mailing 20 million catalogs a year and had achieved an annual sales volume of $30 million.

Melwani had previously invested unsuccessfully in a retail gift shop that had left him with little taste for retailing. But after he began mass mailings of his Royal Silk catalogs, people started coming into his corporate offices in Clifton, New Jersey, asking if they could buy catalog items on the spot.

This led to the opening, in 1982, of the first Royal Silk store, in Clifton. In a couple of years it was doing an annual volume of $1 million and encouraged the company to start opening additional stores, including their flagship store on lower Fifth Avenue in Manhattan.

You will recall our advocacy of double-duty advertising. Royal Silk does triple-duty advertising in selected magazines. The ads (1) offer an item for purchase by mail or phone, (2) offer a free catalog, and (3) promote store traffic by listing the store addresses.
According to Gerald Pike, the company’s vice president, “We include our stores’ addresses in the print ads, and they support the entire operation. We can add the address at no additional cost.”

Another advantage of the catalog and store combination that Royal Silk has found is that their respective seasonal peaks and valleys tend to balance out. In December, the strongest retail month of the year, the catalog business is very slow. But in January it’s just the opposite.

Brookstone is famous for its catalogs of “hard-to-find tools and other fine things.” They also deserve to be famous for their remarkable stores. It’s not easy to invent an entirely new kind of store, but Brookstone has done it. Each store is a kind of walk-in catalog. Or it could be described as a kind of museum of contemporary gadgetry in which everything on display is for sale.

As you enter, instead of picking up a shopping basket, you pick up one of the clipboards, each with its own pen and order form. Displayed on counters or in showcases throughout the store are the items in stockjust one of each-with the catalog description alongside. Thus the store combines the informational advantage of a catalog with the look-touch advantage of a store.

You write the name and order number of the items you want on your order form, exactly as if you were ordering from the catalog, and hand it to the clerk behind the sales counter. A trolley delivers your order form to invisible elves in the back room or basement who pick your items off the shelves and send them back to the sales desk via the trolley. Thus valuable street-floor or up-front space is not crowded and cluttered with stacks of cartons of identical items, nor is it necessary to flag a busy clerk and ask him or her to get you what you want.
It is true that aspects of the system are uniquely suited to Brookstone and similar operations. But there are also clues here to the future of many different kinds of retailing which deserve to be carefully observed and pondered.

Al Schmidt, a noted catalog management executive, tells of reading about a family store in Fayetteville, Arkansas, that was going through hard times. The family instituted a rigorous program of co”st reduction. They changed four-bulb fixtures to two-bulb fixtures. They changed 150-watt bulbs to 75-watt bulbs. And they gave up putting out a Christmas catalog for the first time in 25 years! This story illustrates a common retailer mentality about store catalogs-namely, that they are an expense item, to be expanded when sales are good and cut back when sales are poor.

Such an attitude makes it difficult for most retailers to see the possibility of a store catalog as a separate self-sustaining profit center which can also generate store traffic at no additional cost. There is also a third possibility, largely unexplored. And that is to construct a customer database which will accurately record and total both the mail and phone sales and the in-store sales resulting from featuring an item in a catalog. Then, even if the mail or phone results alone are not enough to make the catalog profitable, it may be possible to determine that the combined sales results are directly profitable-quite apart from the serendipity of store traffic generated. We believe database marketing is and will be the secret weapon of the most successful retailers of tomorrow. But merely designing and implementing your customer database correctly is not enough. To force (or to permit) a store catalog to stand on its own two feet requires a drastic change in thinking, management structure, and operating procedures that many stores are still not able to accomplish.

This is not surprising. Retailing has been evolving for over 100 years. It has developed its own customs, lore, habits, language, sales techniques, and accounting procedures, by this time all highly developed and deeply ingrained.
Mail-order catalog marketing is about as old and has also developed its own customs, lore, habits, language, sales techniques, and accounting procedures. And they are so different from the store retailer’s that it is hard for retail management to make the proper mental adjustment when they attempt catalog marketing.

To take just one example of the difference in the way of thinking: Let’s say that in February a mail-order catalog manager runs a small ad in Better Homes & Gardens for $6000 to offer a free copy of a catalog and receives 6000 replies. Then the manager has the expense of, let’s say, $1500 for printing and mailing a catalog to each of these prospects. The total investment is now $7500 or $1.25 per prospect.

From a store retailer’s point of view, the advertiser has spent $7500 that month and has no sales to show for it. A disaster!
But let’s say the catalog manager knows from past experience with ads in Better Homes & Gardens that 10 percent of these prospects will make one or more purchases. That makes the advertising cost of acquiring a customer $1.25 multiplied by 10, or $12.50. The manager also knows from analysis of the customer database that the lifetime value (LTV) of each of these customers is an estimated $131.17. That is, based on past experience each of these customers should spend an average of $131.17 over the next 3 years. And the gross produced for advertising and profit, after the cost of merchandise, overhead, and repromotion has been deducted, should be $18.50. So the company has provided for a future gross profit of $6 ($18.50 minus $12.50) per customer times 6000 customers, or $36,000.

This simplified calculation leaves out the cost of money and other considerations. But it provides a glimpse of the catalog marketer’s lifetime customer value point of view. It is entirely different from the retailer’s daily and monthly sales quota outlook. A common handicap of store catalogs based on traditional retail psychology is that they are vendor-driven rather than market-driven. Rather than let past public responses dictate the selection of unique merchandise for the catalog, the store will fill the catalog with dozens of similar items that have little mail-order appeal but are subsidized by generous vendor co-op advertising money.

Bloomingdale’s by Mail, Ltd., which has scored such a brilliant success as a free-standing profit center under the inspired management of Barry Marchesault, has sought the best of both worlds. Marchesault selects merchandise of highly likely mail-order appeal-but may not observe the limits of strict mail-order requirements in allocating space for vendor-supported items. The result is that he can afford a more handsome and lavish catalog than would be justified by mail-order sales alone. Thus the catalogs reinforce and strengthen the Bloomingdale image with retail shoppers while yielding excellent mail-order profits.

Bloomingdale’s by Mail was established in 1978 as a separate profit center, with separate management; within 7 years it had built a database of 800,000 non-charge-account customers. Catalog sales were projected to reach $70 million in 1985 and projected to climb to $200 million in 1990. That would make the operation Bloomie’s second largest “store,” right behind its flagship store in Manhattan.

If you are in store management, how can your company overcome the limits of retail thinking and successfully establish a self-sustaining catalog operation? The easiest way is to hire a mail-order catalog manager with a proven track record and give him or her carte blanche. The onh trouble with that-Catch-22-is that the retailing “mind set” up and down the line of store management may make it impossible for such an executive really to achieve carte blanche.
If there is one person in the world who understands the truth of this, it’s Al Schmidt. He experienced it both ways.

Brooks Brothers was having trouble in 1978 with modernizing their catalog operation and invited Schmidt to join them as vice president for direct marketing. In his first few days, he outlined the changes he felt were necessary to make the operation a success:

• A commitment of money for circulation expansion
• Dedicated stocks, separate inventory for filling orders
• Use of third-party credit cards-Visa, MasterCard, American Express, Diner’s Club
• Exchanging and renting of house mailing lists
• The use of a toll-free 800 number for phone orders
• Separate fulfillment facilities for catalog orders
• Different merchandise direction for the catalog, emphasizing unique mail-order items, rather than following the department-by-department approach of the typical retail store
• Use of outside expertise for list maintenance and merge/purge (purging duplicate names from lists used)

According to Schmidt, the chief executive officer was able to recognize the validity of these needs and to see that the means were provided to meet them.
Before Schmidt began, Brooks Brothers had routinely mailed out catalogs three times a year to a list of 300,000 customers who had made at least one purchase sometime within the last 5 years. There was no analysis of results. It was just considered good store promotion.

Within a few years, Schmidt had Brooks Brothers mailing 15+ million catalogs a year and earning an 18 percent pretax profit on sales from them as well as generating substantial store traffic in their 36 retail locations.
In 1981, Schmidt launched the Brooksgate catalog for young men with an initial mailing of 500,000. In addition to the mail-order results,
sales in the Brooksgate departments of the Brooks Brothers stores went up 70 percent.

But later, Schmidt recounts, when he moved on to a similar position at another well-known store, he was not able to achieve a similar success because he could not overcome the retailing “mind set” of the management:

• They wouldn’t budget money for circulation expansion.
• After a year, they still wouldn’t permit the use of third-party credit cards. (They feared it would hurt use of the store’s own card, which is very profitable for a store.)
• They wouldn’t let him establish separate stocks for catalog orders. “My staff that was picking mail-order orders was still fighting over the counters with customers for the merchandise to fill orders.”
Schmidt’s requirement of expanded catalog circulation is worth additional comment. Although your retail customer database is a valuable starting point, your independent mail-order catalog operation will need more prospect names to feed on. This will necessitate the rental of and exchange with outside lists of responsive mail-order buyers. The result will be an expanded catalog customer database which can also be of great benefit to your in-store marketing, especially if you have a number of stores.

If you’re a retailer who would like to emulate the success of the Brooks Brothers catalog, you would be well-advised to find a catalog expert like Al Schmidt, retain him or her as a manager or consultant, and provide the unstinting backing and commitment necessary to get the job done. Because foot-dragging can occur in the ranks of store management personnel who resist change, we also suggest a store policy of educating a few selected middle and junior managers in direct marketing in general and catalog marketing in particular. Send them to the conventions of the Direct Marketing Association, as some smart retailers already do. Take out a few subscriptions to the leading direct-marketing trade publications-Direct Marketing, DM News, Catalog Age. It could be one of your best investments in planning for retailing of the future.

An Opportunity for the Specialty Retailer. You say you’re a very small specialty shop? You say that the $150 million success of Laura Ashley means nothing to your modest operation?

You may be right. But don’t decide too quickly. As long-time practitioners of direct-marketing advertising, we would be the first to warn hopeful amateurs of the odds against starting a mail-order catalog operation from scratch and making a fortune. Although it has been done and can be done, all you hear about are the successes.

What you don’t hear about is the high mortality rate. For every successful business started by filling orders at the kitchen table or in the garage, there are hundreds of failures.

But if your mail-order venture is based on a successful specialty shop with some claim to uniqueness-and if you start with a core mailing list by assiduously collecting the names and addresses of every single customer in your shop and storing them in your computer, along with information about when, how much, and what they bought-you will have doubled or tripled your chances for success.
You won’t be under pressure to grow too quickly. You can start with a catalog just for your customer list and nurse it along-”get the bugs out” of merchandise selection, inventory control, and fulfillment.

You can add to your catalog circulation at comparatively low cost by handing out copies to store visitors whether they buy or not, saving the cost of postage, list rental, and lettershop services. And with today’s incredibly affordable computer hardware and software, you can pioneer in ways to tailor your communications with your customers to their individual tastes and needs.

Here is the story of an unusual small specialty shop that added a catalog and within 5 years was able to multiply its catalog sales volume 200 times.
Good Things Collective was started around 1977 by David Jockasch, who might be described as an alternative lifestyle entrepreneur. He came to the Northhampton-Amherst area of Maine in 1977 and started developing a wholesale-retail business selling homespun unisex clothing. He operated it as a sole proprietorship until 1981, when it was incorporated as a worker-owned business, beginning with six owners.

In 1979 the business moved into a retail store in Northhampton and started a mail-order catalog business in the back of the store. The catalog was considered a sideline, but its business expanded more quickly than the store’s did-within 5 years, catalog sales volume rose from $20,000 to $500,000, 70 percent of the company’s total sales volume.

By their own account, their database started with “friends, friends of friends, people that were referred to us.” Gradually they expanded by advertising in alternative lifestyle magazines like Mother Earth News and New Age, and they mailed to some outside rental lists.

By 1984 their catalog circulation was 100,000. Many established bigname catalog merchants would consider this a laughably small number for a national catalog. But to us it means that Good Things has built its catalog operation cautiously, sensibly, on solid ground every step of the way. And it is a natural supplement to its retail operation.

At last report, the company had moved to a larger store and had moved its catalog operation out of the back room and into a 5000square-foot warehouse in Easthampton. They had customers in 50 states and were analyzing their database to see where their mail-order sales were strongest. This enabled them to at least toy with the idea of opening additional stores in places like Boulder and San Diego.
The Good Things story demonstrates that even a small specialty store with something unique to offer can go national with a mail-order catalog and then can use sales from the catalog as clues to good locations for additional stores.

The term “Social Security” is misleading, and even Congress has felt compelled to take steps to make the word “security” more concrete. Heated debate has surrounded the Social Security program, and questions concerning its solvency are likely to continue producing controversy. For those who will receive Social Security benefits in the near future, government tables list what the benefits will be. For those who are scheduled to retire over the next several decades, the computations will be, at best, guestimates.

One aspect that cannot be overlooked in discussing the problems besetting Social Security is the length of retirement. Life expectancy continues to increase. Government statistics show that the fastest-growing segment of the U. S. population, as a percentage, are those in their 80s. For those under age 60 in the year 2000, life expectancy will be over 100 years. Therefore, although no one knows their “expiration date,” most people can expect to spend a number of years in retirement.

Planning for this long span of time is a challenge for financial planners. It may also be a disheartening aspect of planning, because the increased life expectancy means that more current income is needed to fund future living expenses. For example, several years ago, the Social Security Administration indicated that retired workers received only an average of 13 checks before they died. As previously stated, this has changed. Now clients must be made aware that funding for longer life expectancies will require more of their money.

Most clients, assuming they are not the beneficiaries of a large endowment or trust fund, cannot rely on one source of income during retirement. For the majority, covering living expenses during retirement will require several sources of income, including retirement pensions, individual retirement accounts, Social Security, and investments. If clients are depending on Social Security to provide the lion’s share of retirement income in the future, they may be sadly disappointed. Those near retirement are relatively assured of a certain amount; this is not the case for those with many years to retirement.

Regardless of when a client will retire, the financial planner must assess projected Social Security benefits. First, it is important to look at the cost of contributing to the system. Amendments to the Social Security Act in 1983 were designed to correct projected future deficits by advancing increases in Social Security taxes and reducing or taxing some benefits. Social Security taxes cover Old-Age, Survivors, and Disability Insurance (OASDI) and hospitalization benefits.

The wage base has increased, and now for many individuals, Social Security taxes may be higher than their regular taxes. Clients must be prepared for this new, increased outflow. Therefore, any cash flow projections will have to take this factor into consideration.

Self-employed individuals are entitled to a credit against the self-employment tax of 2.3 percent in 1985, and a credit of 2 percent against the self-employment tax in 1986-89. Beginning in 1990, a new system for taxing the self-employed will eliminate some of the disparities between the self-employed and employees. It is noteworthy that the wage base for determining Social Security taxes must include deferred compensation contributions, such as 401(k) programs. It is especially apparent that the self-employed may well pay more in Social Security taxes than in income taxes.
The 1983 Social Security amendments made several other changes. Notable among these are:

• Automatic cost-of-living increases would be limited if fund balances fall below certain levels.

• Social Security recepients under the age of 70 who work are subject to a $1 reduction in benefits for every $2 of earnings when their earnings exceed a base amount. The base amount for 65 year olds was $6,960 in 1984 and will be adjusted under the terms of earlier legislation. Beginning in 1990, the $1 reduction will apply for every $3 of earnings over the base amount.

• More taxpayers will be subject to Social Security taxes, including such previously exempt groups as federal employees (hired on or after January 1, 1984) and employees of nonprofit organizations.

• The normal retirement age has been increased via phasedin extensions for workers who will reach age 65 after the year 2002. For those born after 1937, the age will gradually rise in two-month increments to a maximum age of 66 for those born between 1943 and 1954. The increase will continue to rise to age 67 for those born in 1960 and later.

One of the most controversial aspects of the Social Security amendment is the taxation of benefits. A maximum of 50 percent of Social Security benefits can be included as taxable income. Beginning in 1984, the taxable amount of Social Security benefits is the lesser of:

• One half of the Social Security benefits, or

• One half of the excess amount of the taxpayer’s modified adjusted gross income plus one half of Social Security benefits, minus the appropriate base exclusion.
Modified adjusted gross income is adjusted gross income plus any tax-exempt income, so that income from all sources, except Social Security, is included. The base amount is:

$32,000 for a married couple filing jointly.
$0 for a married couple filing separately who do not live apart for the entire year.
• $25,000 for all other taxpayers.

The checklist technique of idea generation simply amounts to examining some kind of list that could suggest solutions for a given problem. The theory behind checklists is based on new combinations of unrelated elements, using an idea checklist to force nonobvious and nonhabitual combinations.
Checklists can extend the intuitive idea supply, first, by directly providing solution possibilities, and second, by indirectly stimulating the production of new ideas beyond the list itself.

A. F. Osborn devised a list of 73 idea-spurring questions to inspire product idea generation sessions.’ Following are some of the key question categories:

• Put to other uses? New ways to use the product as is or if modified?

• Adapt? What else is like this? What other place or thing does this suggest?

• Modify? Change meaning, color, motion, sound, odor, form, shape?

• Magnify? More time? Greater frequency? Stronger? Higher? Longer? Thicker? Plus ingredient? Multiply?

• Minify? Smaller? Lower? Shorter? Lighter? Split up? Understate?

• Substitute? Who or what else instead?

• Rearrange? Interchange components? Other layout? Other

sequence? Transpose cause and effect?

• Reverse? Transpose opposites? Turn it backward? Upside
down? Inside out?

• Combine? How about a blend? An assortment? Combine units? Purposes? Appeals?

Companies can compete either by being first to develop and market new products or designs, or by allowing industry innovators to bring out new products innovation, then quickly copying successful characteristics. Since the early 1980s, the pace of change has accelerated, forcing managers to confront more carefully questions of timing in new product development and introduction. In many cases, first movers have benefited from capturing markets early on. In other cases, imitators have fared better. In a competitive environment, managers must choose between deepening their commitment to innovation or relinquishing their leadership position in favor of a strategy of imitation.
Speeding Up
First movers routinely pioneer in bringing new products to market. Many historical first movers are today household names: IBM in mainframes, Xerox in copiers, Ford in autos, GE in appliances, Federal Express in overnight delivery. More recent examples of first movers have included Sinclair, Osborne, and Apple in personal computers; Advanced Memory Systems in microprocessors; Genentech in biotechnology. Early entry generally translates into higher profitability, thereby providing pioneering firms with a competitive advantage over later entrants. All too many early pioneers, however, go bankrupt or move on: RCA pioneered black and white television but no longer produces any; Osborne built the first portable computer but subsequently closed shop. First-mover advantages may be durable, but clearly they are not impregnable. During periods of radical change, when established practices are disrupted profoundly, opportunities for innovation abound. Many firms today are aggressively pursuing opportunities to position themselves as first movers. Managers try to create first-mover advantages either by achieving technological leadership or by making it too costly for consumers to switch to competitors. Whereas building technological advantage has significant structural implications, increasing switching costs involves only designing sticky product features. Examples of sticky features that have produced first-mover advantages include airlines that raised consumers’ switching costs by instituting frequent flyer programs, and TV and VCR manufacturers who made it costly for consumers to change equipment suppliers by making their systems incompatible. So Apple’s unique graphical style provided them instant recognition and a distinct advantage in the early years of the personal computer. But software developments (e.g., Microsoft’s Windows program) have made it possible for IBM clones to look and act just like Apple Macintosh machines, eroding Apple’s advantage and forcing prices down.
In contrast, structural first movers tend to invest heavily to secure patents and quickly move down the learning curve. To develop a head start and deter rivals, their managers spend aggressively on research and development. By being first with a technology, first movers can obtain patents that shelter them from rivals. Often these patents enable innovators to define standards to which the industry as a whole then gravitates. Take Du Pont’s famous Lycra, the original fiber whose generic name is spandex. Although the 31-year-old product’s patent has long since expired, savvy marketing has enabled Du Pont to retain its hold over two thirds of the world market for spandex.
In the last decade, for another instance, Japan’s Sharp Coop. has developed a significant lead in optoelectronics, with first-mover advantages in flat-screen TVs that hang on walls, dual cassette recorders, solid-state calculators, color desktop fax machines, and HDTV projection systems using LCD screens. In all of these areas, competition is likely to be brutal in the years ahead, forcing ever greater commitment of financial, human, and organizational capital to innovation.’ In PC hardware, Compaq has routinely outdone giant IBM by being first to sell machines that incorporate the latest technology-a strategy that has secured the company a stable 4-percent share of the market. In the days when Big Blue had yet to offer a portable PC, Compaq’s was a hit. Later, Compaq was invariably first to feature the newest and most powerful microchips. Maintaining first-mover status, however, has become increasingly difficult as IBM and other PC makers such as Dell Computer, Packard Bell, and AST Research bring out competing clones more and more quickly. Recently, both IBM and Hewlett-Packard beat Compaq to market with products featuring the latest 486 chip To meet the challenge will require of Compaq either accelerated innovation or a strategic change designed to capitalize on global expansion while adopting an imitator strategy in the U.S. market.
In global environments, however, domestically granted patents, have proven less than effective as a source of advantage. For one, there is no adequate global system for enforcing patents and registrations. So competitors in foreign markets can more easily knock off products with impunity. Moreover, the time between filing and approval can be as long as 7 years, limiting the period for recovery of development costs, and so reducing the firm’s advantage. Moreover, if a patent is for a unique design rather than a new technology, it can prove entirely ineffectual. Take Zilch, maker of the Its Bitty book light so popular with bedtime readers. Introduced in 1982 in a clever book-like packaging, within a year exact copies, down to the packaging, were introduced in Korea, Taiwan, Germany, Italy, and Australia. According to the U.S. Trade Representative’s office, design knock-offs cost U.S. companies up to $40 billion in lost sales, royalties, and licensing fees annually.’
Besides relying on patents, many firms create advantage by emphasizing learning by doing. In a comparison of the largest U.S., British, and German firms, historian Alfred Chandler found that advantages accrued historically to firms who were first to exploit scale economies by investing in product-specific facilities and management-led administrative structures. 12 By leading in the decision to adopt improved production processes, to invest in efficient systems of distribution, to install research laboratories, and to train technicians, these managers ensured that their firms would move quickly down the learning curve. Rapid learning guaranteed that latecomers would have to make larger and riskier outlays of capital. A detailed study of the chemical industry confirms that cumulative experience increases the annual number of patents filed and leads to rapid reductions in product prices, which discourages new entrants.
Only a few years ago, for instance, high-tech giant Motorola seemed destined for a takeover, with its key markets in chips, pagers, and cellular phones taken over by Japanese competitors such as NEC, Toshiba, Hitachi, and its U.S. nemesis, Texas Instruments. In a dramatic gamble, since 1986 the company has poured billions into research and development to recapture a leadership position in semiconductors. The result: In 1988, Motorola was the first to introduce a new breed of digital signalprocessing chip (DSP) that is expected to feature prominently in the combined handling of image and voice signals. Aggressive R&D is also paying off in cellular phones, from which Motorola derived $1.3 billion in revenues in 1989.’
Global competition is compelling first movers to allocate more funds to R&D than ever before. In order to spread risk, companies introducing products with short life cycles and relying on rapidly changing technologies have lobbied U.S. officials successfully under Ronald Reagan’s presidency, getting them to set aside antitrust laws that prevented cooperative R&D both with domestic competitors and across borders. In the early 1980s, a group of U.S. Silicon Valley companies formed an R&D consortium, Sematech, funded half by industry and half by government, to reduce growing dependence on Japanese chip manufacturing. Similar cooperative R&D programs have been established in Europe.
At the same time, U.S. and European companies have been spending more aggressively than ever to develop products tailored to the European market. While research results suggest that centralized R&D costs less and is easier to coordinate, we also know that gains from commercialization are more difficult to capture when R&D is too far removed from ultimate markets. 16 The familiar tension between the functional areas of marketing, R&D, and manufacturing gets exacerbated as firms struggle to compete in global markets by trying, on the one hand, to reduce scale economies within functional areas, while responding, on the other hand, to the requirements of differentiated markets. The pressure on first movers has therefore grown more acute. It comes from two sources: globalization that has heightened rivalry, and aggressive encroachment by imitators eager to reap the advantages of leadership.
When Followers Play Leapfrog Humbled by the complexities of maintaining a first-mover position, some firms are electing a back seat, “second-mover” strategy when they expect that patent or other barriers will not prevent them from imitating an innovation at a cost substantially below the pioneer’s development costs. In many industries, patents and R&D offer only weak protection to innovating firms, and new products are easily imitated. A comparative study of 48 product innovations, for instance, showed that 60 percent of successfully patented innovations were actually imitated within 4 years. Patents appear most significant in prescription drugs where imitation costs traceable to patents are some 30 percent higher, compared with about 10 percent in chemicals and only 7 percent in electronics. 17 If following sometimes proves cost effective, which firms are doing better as imitators?
In the PC market, firms like AST, Dell Computer, and Packard Bell have grown rapidly in the last few years to catch up to leaders like Compaq, Tandy, and IBM. Between 1987 and 1989, while Tandy’s share fell from 7.1 to 4.8 percent, Packard Bell’s share in selling PC clones rose to 3.7 percent. Key to their success has been a combination of lower prices, distribution through mass merchandisers like Sears Roebuck rather than dealers, and customer service.’
Large sample studies of the semiconductor industry suggest that early followers have tended to be subsidiaries and divisions of large, established firms with existing businesses in related areas, firms such as Fairchild and Texas Instruments.’`’ In a study of 129 start-up ventures, for instance, one researcher found that imitators had widely diversified parent firms, spent less on marketing their products than rivals, and had lower product quality and customer service than first movers. What appears to drive early followers, then, is principally rapid learning from pioneers and swift capture of experience gains.
To quickly imitate pioneers and capture market share, astute followers develop efficient external information gathering. By cultivating competitor intelligence, constantly scanning environments, and rapidly responding to opportunity, imitators can often capitalize on the large investments made by pioneers in R&D, buyer education, and personnel training. In semiconductors, for instance, Fairchild benefited from the early efforts of Shockley Transistors, the firm started by transistor pioneer William Shockley which was dissolved and whose employees then joined Fairchild .21 The training programs of money center banks also serve to diffuse accounting standards and product innovations. Empirical studies of the diffusion of innovations suggest that imitators gain access to detailed information on products and manufacturing processes within only 1 year of development through the interpersonal and exchange networks that exist within technological communities.
Because imitators rely on other firms to pioneer, they invest little in basic research and dwell more heavily on product development in related technologies. By focusing on price as a means of competing with first movers, they strive quickly to acquire experience gains. Competitive intelligence enables them to avoid the technological mistakes made by pioneers, and to incorporate into their product designs the timely feedback of the product’s initial consumers.
Revolutionary environments present managers with a unique opportunity to swerve from their original business strategies. Early innovators find it more difficult to maintain their position of leadership as specialized start-ups aggressively attack their narrow niches. Similarly, as early imitators grow in confidence and expertise, they often aspire to take over the leadership role from established firms. As attractive as it may appear, however, shifting from an imitator to a first-mover strategy is a risky endeavor: Imitators have relatively primitive skills in product development and lack the internal fiber needed to move quickly to commercialize them. When managers contemplate a fundamental reorientation within business units that involves altering the speed and timing with which their firms innovate, they must carefully assess whether their internal systems are strong enough to withstand the transformation.