The making and marketing of the mechanical reaper is one of the great triumphs of modern civilization. 1 Until the 1830’s, crops were harvested by hand, using a 4,000 year old process as depicted in the detailed dr awings on the walls of Egyptian tombs. Think about it, 4,000 years and no real progress in the harvesting process. The mechanization of farming in the United States was also a major reason why the United States became a super-power 100 years ago, surging ahead of every other country in its output. Cyrus Hall McCormick grew up on his father’s farm of 1,800 acres at Walnut Grove, in the Shenandoah Valley of Virginia. His father Robert had spent many years trying to improve basic farm equipment and trying to invent a horse-drawn reaper to replace the hand-held scythe. To reap is to cut or harvest a crop such as wheat. Robert passed on his rather rickety invention that was still not sturdy enough to handle the working conditions (the roughness of the paddocks), to his son Cyrus in the late 1820’s. Cyrus improved on it and made it sturdier but his real genius was not in his invention of the reaper but in his innovative and entrepreneurial marketing of his invention. The 22-year-old Cyrus was reported to have farm-tested his latest version of the reaper in 1831 and 1832 (not entirely successfully), but he did not take out a patent until 1834 when he heard that another inventor, H.F. Mann, had developed a very similar machine and was promoting it in the state of New York.McCormick was not able to renew his patent and extend it in the late 1840’s because a number of people disputed the primacy of his first patent. He wisely recognized that his success would not come from patent protection and defending a patent. Time and time again innovators have made this mistake. He understood that success would come from his mass marketing efforts, that would generate mass manufacturing, that would reduce costs, that would lead to lower prices and more profits to be invested back in product and market development, that would lead to even greater sales growth and so a virtuous cycle (sometimes called a virtuous circle or spiral) is created that leads to the domination of a pioneering company that leaves the competition in the dust. By 1850, there were some 30 reaper firms that were imitating/innovating his 1 This case is drawn from Cyrus McCormick, The Century of the Reaper, Boston, Houghton Mifflin, 1931 and Norbet Lyons, The McCormick Reaper Legend, New York, Press, 1955.
Module 1 • What is Marketing? • Cases • ©Backbone Press 2009 2reaper but most firms were not much more than extended blacksmith/foundry works making one reaper a week. Their only future would be to become contract suppliers to McCormick’s mass marketing machine.In fact, in the 1840’s McCormick already was having his reaper made under license by a number of small businesses in Illinois, Iowa, Michigan, Missouri, Ohio, Tennessee, and Wisconsin. Several of these licensees (Such as Seymour and Morgan, Mann and the Fountain Brothers) became competitors by adding their own improvements. But by then it did not matter, because they had helped grow McCormick’s business and he most certainly was not standing still. Indeed, in many cases he was happy to let them go. From 1841 to 1845, McCormick constantly improved the design, but he raged at the damage done to his reputation (not to mention the farmers crops) by some licensees’ slip-shod manufacturing. Product quality was really important from the get go. He decided the only way to maintain and improve the quality of his machines was to terminate existing licensee agreements and manufacture them all himself. Classic lesson. If you cannot control the quality of your suppliers then you cannot outsource – a lesson being repeatedly learned today in global sourcing manufacturing and customer services. If you do not have the quality systems controls, don’t outsource. First, he set up a proper manufacturing operation in Cincinnati in 1845, a business owned by a Mr. Brown and run by his brother, Leander McCormick. In 1846, he set up a similar operation in New York. Still unhappy with the manufacturing quality, he moved to Chicago where in 1848 he made 500 of the 778 McCormick reapers built that year. In 1849, 1,500 reapers were built in his manufacturing plant, and in 1856, 4,000. He set up one of the first plants in the world to mass produce standardized parts, ideally positioned on the river and lake front east of Massachusetts Avenue, with barges and sailboats able to load on one side of the plant and a railway line on the other. The lathes, grinders, and saws in his plant were driven by one of the first large steam engines in Chicago. In 1859, his brother William wrote to him saying, “Your money has been made not out of your patents but by making and selling machines. “ He had the genius to invent the modern business. The following quote from his grandson, published in 1931, seems particularly modern:He preached quality to the factory men until it was engraved on their hearts. In modern parlance, he “sold” them quality so well they understood the necessity for it and therefore believed in it. Each year the McCormick reaper became heavier, stronger, better: each year it gained more favorwith the farmers. My father has told me how he used to hear his father say, “I don’t want to make my entire profit from a single sale, I want to make the machines so good that the farmer and his sons will come back again and again to buy more McCormick machines.Note the stress on customer focus, product quality and innovation, the continuous improvement effort, and the objective of building customer satisfaction and long-term brand loyalty. If this sounds too good to be true, it should also be recognized that it took Cyrus from 1831 to 1842 to be really satisfied with the quality of his reaper and in that year he took the extraordinarily bold step of offering an absolute guaranty of satisfactory performance or the return of your money. Such a guaranty was unheard of for any product, let alone the most expensive farm implement you could buy. And he stood by his warranty. The gearing on the 1853 reapers was defective and it was replaced, free of cost to all purchasers.McCormick’s Marketing Insights1. He understood that manufacturing and marketing process innovation was an important as product invention, even more important. He could and did buy other patented feature improvements but only he could build the manufacturing and marketing operation he created. 2. He recognized early on that the huge market for the reaper was in the West and not the East, so he set up in Chicago, at a time when there were still wolves in its suburbs. This gave him a huge location advantage over his major eastern competitors.3. He understood not only where the market was but also the harvesting process that demanded fast delivery and excellent after-sales service. After all, the farmer’s crop and livelihood were at stake. Ti ming in harvesting is very i mportant; any delay exposed the crop to catastrophic loss from weather, insects, or birds. Module 1 • What is Marketing? • Cases • ©Backbone Press 2009 34. He understood the opportunity presented by the Civil War (a political event). The manpower shortage on the farm encouraged the use of labor-saving technology and the huge armies greatly increased the national demand for buying grain. McCormick supplied both sides, the South on the sly. 5. He understood the opportunity created by the new popular press to communicate with farmers who had just become literate.6. He understood how to use the railway, the new distribution technology, very effectively. 7. He saw how to use the local merchants as sub-agents in the sales, service, and d ebt collection processes. The local merchants knew and trusted the farmers and vice versa, thus greatly reducing bad debts. 8. He understood the importance of having quality manufacturing management and hired his brother to run the operation. As an aside, his factory burned down in 1851 and again in 1871 which in the end was fortuitous because it allowed improvements in production processes and increases in capacity.9. He understood the importance of having a highly respected business partner (William Ogden, the undisputed first citizen of Chicago) as an early partner to help open the doors to cheap financing and to deal with local regulations and politics. He also understood the importance of having Ogden as a silent or sleeping partner who would stay out of the day-to-day running of the business and not create debilitating internal fights over reinvestments and strategy.McCormick’s Marketing Process InnovationsProduct Quality. The product was shipped only partly assembled (an early example of a postponed assembly process that saved freight costs and reduce manufacturing costs). The farmer had to attach the wheels, and other parts, and also adjust the settings of the machine. Not only were excellent written assembly instructions provided, but the parts were painted with numbers on them to help assembly and later with simple directions on how to adjust settings (such as indicating with an arrow which way to turn a handle or move a bolt in a slot). Cyrus recognized that quality performance and durability depended on how well the farmer assembled the reaper, set it, and maintained it, something that many modern marketers have never learned or forgot with their instructions. In the early years factory experts were sent out to help the agents (in itself a sensible way of teaching the factory engineers about customer behavior). They discovered that many farmers left their reapers out in the fields through the winter, ignoring them until the last frantic moment before harvest. The result was that often crops were ruined by weather or pests because of a rusted bolt or because the poorly set and maintained reaper was damaged in its next use. This led to winterizing instructions and the sale of a lot more protective grease.Repairs and Maintenance.McCormick developed standardized parts, such as wheels, which were used on s e veral of his pieces of equipment. This enabled the farmer to cannibalize his other equipment in an emergency (provided he had also purchased other McCormick farm implements), reduce the parts inventory of his local dealers, and greatly reduce the cost of manufacturing and parts supply. Distribution and Selling. As noted above, in the early 1840’s local agents were set up. Their contract required that they: “Maintain a sample machine, canvass the wheat districts in their territory, deliver reapers and instruct buyers on their operation, stock spare parts, be prepared to do repair work and render field service, make reports, collect money due on notes, and distribute advertising. They often operated through sub-agents, country blacksmiths or general storekeepers,” Cyrus set up these agents in the early days, then in 1845 he hired his cousin J.B. McCormick to cover Kentucky, Tennessee, and Missouri, and in 1848 three traveling agents were appointed as territorial supervisors of the local agents. The agent system worked very well because the local sub-agents were guaranteed payment because the farmer depended on them for other essentials. As the railways penetrated the mid-west, McCormick’s traveling agents were first off the train setting up local agents, and because the railways were primarily built to carry cattle to Chicago, this gave McCormick a major break. Many wagons were empty on the return trip so back-haul rates to deliver farm equipment were low, especially at the volume deals that McCormick could negotiate with the railways. This was one of his big cost advantages over his competition. Earlier his machines were shipped by boat and barge throughout the canal system that flourished in Ohio, Pennsylvania, and New York from 1830-1850. One of the reasons it took 20 years for his business to start booming was that the transportation infrastructure that opened up the market was not yet in place. Module 1 • What is Marketing? • Cases • ©Backbone Press 2009 4Advertising and Publicity Management. Cyrus McCormick was also a genuine pioneer of promotions and advertising. For example, From January 1833 to January 1835, McC or mick placed 105 notices (free PR stories) and advertisements in the Lexington Union. But what is interesting is what was promoted:Hillside Plows 53Threshing Machine 36 Mechanical Reaper 7 At that time Cyrus and his father believed more in their plows and threshing machines. According to one historian, this advertising “campaign” to build the reputation of the McCormick Brand was the first of its kind in American economic history. The advertisements used testimonials, adding authenticity to the advertising claims.His early 1832-1834 advertising campaign was picked up and given free publicity by the Farmer’s Registerof Richmond, Virginia, the New York Farmer, and the Mechanics Magazine of New York. Later, McCormick developed his own magazine, Farmers Advanced that reprinted the latest recommendations for crop rotation, fertilizing, weed and insect control, and the use of hybrid seeds from the Agricultural Colleges and Stations created by the U.S. Agriculture Service and the Land Grant Universities. All of this advice to his past customers was very valuable and it cost McCormick nothing to fill its pages. He also created features where farmers wrote in with their own recommendations and advice as to how to improve farming processes. These columns were very popular. Liberally sprinkled throughout the magazine were articles on new McCormick farm machinery, order forms, and advertising of other products. At one time, the circulation of this magazine was in the hundreds of thousands. McCormick first used display advertising in the 1840’s, when he had local agents pass out illustrations from his patent application to farmers (see the illustration above). Note the puffery used in the cues: the horses are sleek, groomed and almost prancing, the man raking the straw is dressed in his Sunday best and a top hat! Later advertising played on the tremendous popularity of the equipment, again using the endorsements and behavior of others to encourage laggards to buy. As far as promotion was concerned, in his early days McCormick had no rivals. He encouraged field demonstrations on respected local farmers’ property after Church on Sunday. The women folk came by to gossip and to see what their husbands intended to spend their limited resources on. The men watched and talked each other into buying the new equipment. Aid organizations still use a similar technique to encourage the diffusion of new farming techniques in developing countries. Much has been written about social influence in the diffusion of innovations in close-knit communities; decades after McCormick understood the theory and put it into practice. His machines did not always best his rivals’, but that mattered little. Why? Because the bravado he showed by publicly challenging his rivals signaled confidence in the superiority of his product, and only the attendees saw his equipment bested. Th e advertisements afterwards never told the full story. Sound familiar?McCormick knew his customers and he knew how to put a campaign together. He used Agriculture Shows to display and demonstrate his new equipment and later took his machinery to international expositions in Europe, where his inventions won awards: the equivalent of today’s J.D. Powers Quality Awards. He di d this to start up his export sales, which grew considerably from 1870 on, and also to reinforce his reputation back home. Europe was the leader in industrial inventions through the century, so awards from European organizations or Governments were very prestigious. In fact, an extraordinary story is told of McCormick representatives making several trips to Russia in the 1890’s to set up a manufacturing plant to make reapers and threshers to increase the farming productivity and returns from the huge Russian wheat harvest. Unfortunately, the Czar was not a modernist and believed in the traditional agricultural ways, which led to mass starvation only 10 years later, and to revolt that later culminated in revolution. Who knows what impact the early modernizing of the Russian farming economy might have had on Russia’s political economy? No one can dispute that the early mechanization of American farming had a major impact on the growth of the United States into a super power. Pricing. McCormick was inno vative in his pricing in several ways. First he sold his early reapers at a price barely over cost. The idea was to get his product out in use rather than to make a quick killing; penetration Module 1 • What is Marketing? • Cases • ©Backbone Press 2009 5pricing is what this tactic is called today. Second, he introduced a standard price. His competitors often haggled over price (as we still do with cars), but the problem with this is best characterized by telling a story of two neighbors who have just finished working in their fields with their McCormick Harvesters and are swapping stories about what a godsend their reapers are, but one comes away from the conversation upset and bitter, no longer a word-of-mouth promoter of McCormick equipment. Why? He discovered that he paid mor e for his reaper than his neighbor and his neighbor rubbed it in. That is the disadvantage of not charging a standard price. It creates bad will in the haggling and afterwards when buyers have discovered they paid too much. A new risky invention and brand cannot afford such bad will. McCormick created a competitive advantage for himself by standardizing the price early on. He also introduced term payment, an innovative idea that was considered very risky at that time. For example, in the early 1850’s his reaper cost $125. The farmer was asked to make a deposit of $35 plus the freight from Chicago. The balance was due on December 1 after the farmer had received payment for his harvest, with a six percent interest charge on the balance outstanding after July 1 of the next year. To get a sense of the investment the farmer was making, at that time a horse cost about $20 to $30. In practice, the farmer often made a deposit as low as $15 and the balance was collected by the local agent over the next 18 months. McCormick’s credit losses varied from 3 to 5 percent but his margin easily covered this risk. Thi s extended credit required a huge amount of working capital but the firm’s internal earnings were such that it was able to support not only growth in receivables (customer credit), but also a $100,000 loan McCormick extended to Marshall Field after the 1871 Chicago fire, to start up his department store business again. Furthermore, McCormick’s early expansion, servicing of all of the Midwest and East, reduced his risk exposure. If there was a drought or disaster in one part of the country that wiped out the farmers’ revenue, he could carry the farmers’ debt in a way that a local farm supplier could not. Indeed, a story is told that Cyrus McCormick visited Webster City, Iowa, where all the crops had failed, shook hands with all the farmers who owed him money, and promised to see them through, winning their loyalty forever.This story has a sad ending. In 1902, during the time of the great business Trusts, International Harvester was created by combining fi ve fir ms including McCormick. By the late 1940’s Harvester dominated the farm equipment business with a 60 percent share of the domestic market. However, several decades of ver y bad management ran the company into the ground and in 1984 Harvester sold its farm equipment business. Errors such as conceding far too much to unions for no improvements in productivity, getting into other businesses such as marketing refrigerators, and paying out 90 percent of earnings in dividends to shareholders rather than re-investing more in the company, contributed; but most importantly the modern managers had none of the inventiveness, drive and management ability of the founder, none of his complex process thinking and political implementation skills.