IL MARKETING. THE DOWNSTREAM COMPANY

Il marketing. The Downstream Company.

How a different organization impacts on marketing function and why is it so difficult a change in the companies.

The ideas rest on the concept of an organization having a center of gravity. This center arises from the firm’s initial success in the industry in which it grew up. The center of gravity of a company depends on where in the industry supply chain the company started. A supply chain is composed by different stages depending if the company is involved in manufacturing, retailing, service, etc. Considering a manufacturing company we could have six stages: raw materials, primary manufacturer, fabrication, product, distributor, retailer. The chain begins with a raw material extraction till the retailer where is the direct contact with the consumer. Service industries typically have fewer stages. So if you draw a line splitting the chain in two segments you divide the industry into upstream and downstream. The differences between the upstream and dowstream companies are striking. The upstream stages add value by reducing the variety of raw materials found on the earth’s surface to a few standard commodities. The purpose is to produce flexible raw materials and intermediate products from which an increasing variety of downstream products are made. The downstream stages add value through producing a variety of product to meet varying customer needs. The downstream value is added through product positioning, advertsing, marketing channels and research. Thus, the upstream and downstream companies face very different business problems and tasks. A distinction between upstream and downstream companies is necessary because the factors for success, management and organizations are fundamentally different.

Upstream Downstream
Standardize/homogenize Customize
Low-cost producer High margins
Process innovation Product innovation
Capital budget Advertising /R&D budget
Technological/capital intensive People intensive
Supply/engineering specialisation Marketing/R&D specialisation
Line driven Line/Staff
Maximaze end users Target end users
Sales orientation (push strategies) Market orientation (pull strategies)

Upstream is for the efficiency. Downstream for customization. The upstream company wants to standardize in order to maximize the number of end users and get volume to lower costs. The downstream company wants to target particular sets of end users. The competition is different. Commodities compete on price since the products are the same. It is essential for the upstreamer be the low-cost producer. Their organizations work with a minimum of overheads. Low cost it also important for the downstreamer but it works to generate higher margins. This could be done with a brand image, a patented technology, an endorsement, a marketing experience, a good customer service policy and so on. Competition revolves around product features or positioning, less on price. This means that marketing and product management sets prices. Products move by marketing pull. Instead of upstream companies that push the product through a strong sales force. The organizations are different and the way of investing financial resources as well. This permits to understand how is difficult to change organizations and why market’s approach is really different. Writing about this we normally refer to big companies but the same principles are in the small and medium enterprises. In other words a firm starts succefully from its center of gravity and that could shape its organization and its marketing behavior on the markets.

The deal between strategy and organization never ended. Much of this work consists of empirical tests of Chandler’s ideas presented in Strategy and Structure written in 1962. Most of this material is reviewed elsewhere. Galbraith, Mintzberg, Hamal, Abell, Hammond are some of more important contributors. Some recent works and ideas hold out considerable potential for understanding how different patterns of strategic change lead to different organization structures, management systems, marketing attitudes and company cultures. In addition, some good relationships with economic performance are also attained.

Sources: H. Mintzberg, J.B. Quinn, The Strategy Process. H.I. Ansoff, Corporate Strategy. H. Mintzberg, Structure in Fives. Designing effective organizations. A,D. Chandler, Strategy and Structure.