CASTELL6N (SPAIN)

DOES THE CERAMIC TILE MANUFACTURINGINDUSTRY SUFFER FROM MARKETING MYOPIA?A REVIEW OF THE IDEAS OF THEODORE LEVITT

Javier Sastre Martin

Sastre & Asociados. Business administration consultants

ABSTRACT

One of the most famous articles of all time on business management is the articleentitled"Marketing Myopia", which could translate into Spanish as "Miopiaen marketing". TheodoreLevitt wrote this in the 1960s and the paper's fame is due to the stir that it caused in thebusiness and academic world at that time.

This article, which deals with the lack of vision by executives and the mistakenassumptions and beliefs that take hold widely in industry, has had such an influence that it isstill quite commonly found in today's textbooks on marketing or business administration. Infact, it is still studied at the most prestigious business schools.

Theodore Levitt is currently professor emeritus of the Harvard Business School(Massachusetts, U.S.A.) and is one of the most respected authorities on businessadministration and marketing.

In this communication we shall review the basic ideas that Levitt set out in his paper,with a view to ascertaining whether today, in the Spanish ceramic tile industry, managerscould be guilty to some extent of those erroneous assumptions or nearsightedness. Based onthis, we shall then attempt to draw some constructive conclusions in these times of change forthe sector.

P.GII - 109

CASTELL6N (SPAIN)

1. GROWTH INDUSTRIES

In his classic article, Levitt observes that all the major industries (automobile,railroad, oil, etc.) were at some time considered growth industries. Unfortunately,many of these found themselves almost suddenly in a situation of stagnation, if notdecline.

What do we mean by a growth industry?

To put it simply, we can say that an industry is a growth industry when it hascontinuous double digit annual growth rates. That is to say, rates of 10% or higher.

The Spanish ceramic tile manufacturing industry is, of course, an importantindustry because of its dynamism, its export vocation, its relative global importance,etc .

Can the Spanish tile manufacturing industry be considered a growth industry?

It obviously was in the 1990s, when according to data from ASCER, average tileproduction grew by over 16% annually between 1990 and 2001.

However, perhaps it would be advisable instead to focu s on the most recentdata, set out in the following table, to establish whether this is still the case .

Spain 1997 1998 1999 2000 2001 2002provisional

Annualproduction 14,4% 16,3% 6,7% 3,2% 2,7% 2,0%growth

In view of the parameter established at the outset (double digit annual growth), theSpanish ceramic industry is clearly no longer an industry with a growing production.

And note that this is de spite the fact that the Spanish tile industry "h as caughtup with" the Italian tile manufacturing industry, the Spanish industry's referencepoint par excellence. However, the Italian industry has also for quite some timeceased to be a growth industry (see table below).

Italy 1997 1998 1999 2000 2001 2002provisional

Annualproduction 3,2% 2,9% 2,9% 4,2% 1,0% -5,2%growth

PGII - 110

This has happened in a context in which, on a global scale, world tile productiongrowth has remained approximately stable (see table below ). The table shows that theSpanish ceramic tile industry's share in world tile production has fallen since 2000, asSpanish tile production has grown less than that of world tile production.

P.GII - 110

CASTELL6N (SPAIN)

World 1997 1998 1999 2000 2001 2002provisional

Annualproduction 4,0% 6,7% 4,6% 4,1% 5,4% 6,1%growth

In addition, the average growth of some of the more important emerging tileproducing countries has been much higher, as the following table shows (averageannual growth between 1996 and 2002).

CountriesProduction growth Production 2002

(annual average) <thousands of m ')

Vietnam 63,1% 97.184

Poland 20,4% 53.608

Egypt 19,5% 73.159

Czech Republic 15,6% 47.697

Iran 13,6% 107.507

India 12,4% 137.262

Mexico 11,4% 150.520

China 7,7% 2.240.000

Spain 7,3% 651.000

Italy 1,1% 605.500

These figures should logically be accompanied by production value, butalthough these values are unavailable, they may certainly be considered significant.

Could the Spanish tile industry be entering a situation of sudden downturn, asLevitt indicates occurred in other important industries? How could we determinethis?

2. THE FAILURE OF THE MANAGERS

In the first place, Levitt tells us that in fact, in a broad sense, growth industriesdo not exist. What you have are individual companies organized and directed tocreate and take advantage of growth opportunities that appear in their markets.

And what happens is that sometimes such opportunities are "more visible" andalmost all the companies in a sector take advantage of them, whereas on otheroccasions, opportunities are much less obvious, and only the best-equippedcompanies are able to take advantage of these.

Consequently, if sectors or industries no longer grow or stop growing together,why is a company affected by a general decline?

P.GII - 111

CASTELL6N (SPAIN)

Levitt indicates that the main reason for individual company growth to stagnateor be constrained is not market saturation, an explanation that obviously lies at hand,but something much more essential: the failure of industry management.

Failure, inasmuch as executives are the persons responsible for establishing thecorporate objectives and strategies that decide the future of their companies, andwhich will make their companies flourish or fail.

Why do managers fail?

Because they lack vision. Because they do not define the aims of their companiesproperly, but only do so in a limited and short-sighted way. Hence the title of Levitt'spaper.

This lack of vision materializes in two forms:

First, managers do not focus on what is truly important for any type of industry,independently of the existing economic circumstances: satisfying the real needs ofconsumers, their actual clients.

That is to say, they happen not to be market oriented. This, despite theirappearing to act as such, in view of the superficial, highly fashionable cliches that arebandied around merely as slogans in most companies, of the type: "the client ispivotal", "the customer is king", etc.

To be market oriented means to be completely focused on satisfying the actualneeds (not the hypothetical ones) of clients. It should be noted that when we refer toclients we are referring in particular to the consumer, although one ought not to forgetthe direct clients (whether these be stockists, distributors, builders, etc.).

The second reality is that managers establish a narrow definition of their own market.

To establish a non-narrow market definition again involves returning to thevalue chain, towards consumers, and determining what essential needs the companycan satisfy with available technology, both in markets of persons and in those ofindustry. In this way, the company market is appropriately established.

Are companies in the Spanish tile manufacturing industry market oriented, orinstead, are they more production oriented, in the sense of being basically concernedwith manufacturing and selling their production as profitably as possible?

Companies in the Spanish tile manufacturing industry can not be consideredmarket oriented, in view of the scarce development, in general, of that corporatefunction that deals with ascertaining and trying to satisfy customer needs. Thatfunction is known as marketing.

Indeed, in the tile manufacturing sector there continues to be a pronouncedproduction or product orientation (in this latter case the preoccupation centres onmaking quality products). Examples of this are readily found:

• The client is supposed to choose out of a wide range of finished products,instead of the company inquiring into the user's needs when the productswere to be designed and developed.

PCB-Il2

CASTELL6N (SPAIN)

• Growing numbers of items are made in an attempt, with any luck, to findsomething that is successful among the clients, even though every yearwitnesses talk of narrowing product ranges.

• The markets are not sufficiently differentiated; the entire product range isoffered to all markets, instead of being adapted to the peculiarities of eachmarket, leaving aside the rest of the products.

So, is the market defined in a narrow way in the Spanish tile manufacturing industry?

Judge for yourself:

It certainly is narrowly defined by those that think that their business is the"production" of ceramic floor and wall tiles and that, therefore, their market is "only"represented by those players in the market that buy their production directly fromthem. Although behind these buyers there logically stands an end-user or consumer.

In this case, those that buy the production, except for noteworthy exceptions thathave their own distribution, are generally stockists, distributors and builders. Noneof these is an end-user or consumer.

For this type of mentality, competitors are all those manufacturers that try to sellto these same builders, distributors and stockists.

In contrast however, the market is not narrowly defined by those that considerthe business of the industry to be that of satisfying tiling needs in the differenthabitats used by human beings, whether in the workplace, living quarters or leisuredomains, interiors or exteriors.

Now the market, i.e., the clients, will be all who have tiling needs in theirhabitats. And this is a much larger group, made up of all the end-users, whetherindividuals, families, companies or public bodies.

In this case, competitors are all those that can offer tiling solutions for thedifferent needs of the end-user, regardless of the user's aesthetic and technicalpreferences. That is to say, substitute products are now also taken into account.

In other words, these involve other ceramic floor and wall tile manufacturers,but also producers of natural stone, bricks, composite materials (gypsum, mortar),organic materials (wood, cork, wallpaper, textiles), polymer materials (vinyl,linoleum, rubber, gum), metallic materials, etc.

3. CHARACTERISTIC BELIEFS IN THE DOWNWARD CYCLE

Levitt identifies a series of widely held mistaken beliefs or assumptions amongstmanagers, together with an inadequate market orientation and narrow marketdefinition in industries that entered processes of unexpected decline from a previoussituation of continuous, prolonged growth.

These downward processes are characterized by having a large number ofcompanies in the particular industry involved start to operate with a feeling of negativeinertia, in which growth rates steadily decrease and margins progressively tighten.

PCII - 113

CASTELL6N (SPAIN)

We do not by any means wish to suggest that the Spanish tile manufacturingindustry is in a stage of decline. However, we do wish to establish whether these beliefsoccur to any degree within the sector, in order to put it on its guard to avoid that risk.

The four erroneous beliefs or assumptions of top managers, which Levittidentified in industries that entered a process of unexpected decline, are:

• 1st belief: The myth of population

• 2nd belief: The non-existence of competitive substitutes

• 3rd belief: The unbeatability of mass production

• 4th belief: The obsession for R&D

We shall now review what each of these beliefs involves, and establish whetherthey are to be found in the Spanish ceramic tile manufacturing industry at this moment.

3.1. pT BELIEF: THE MYTH OF POPULATION

Levitt tells us that many managers exhibit an unjustified confidence in indefinitemarket growth, based on population growth and a rising standard of living of thepopulation.

The danger that lies in wait behind this belief is that a market in permanentexpansion saves the manufacturer from needing to think too much and imaginatively,as company growth is expected to occur easily thanks to the "organic growth" of itsmarket.

Let us see whether the factors relating to this belief have led to its spread in thetile manufacturing industry.

Organic or natural growth of the tile manufacturing market can be produced by:

• Increased housing construction.

• Increased construction of public buildings.

• Greater and faster renewal of tiles in dwellings and other facilities of publicand private use.

Without going into further detail, which the length of this communication does notallow, increased housing construction depends on three variables: population growth, theinvestment-speculation component and the rise in level of wealth of the population.

Since the 1980s, population growth has been a factor that depends on economiccircumstances, and is not a law that is inevitably obeyed.

Nowadays, few managers will expect market growth in Spain to be achieved asa result of continuous population growth, as Spain has one of the lowest birth rates inthe world. Despite immigration. Moreover, this situation seems generalized in mostof the developed Western countries.

Possibilities of population growth can be observed, although always of acircumstantial character, in developing countries.

PGII - 114

CASTELL6N (SPAIN)

Therefore, if the Spanish ceramic industry wishes to base its growth onpopulation growth, it will consequently not be in the domestic market but in foreignmarkets, preferentially in the ones mentioned above, where this can be done based oneconomic circumstances.

On the other hand, recent years have witnessed an enormous boom in newhousing construction in Spain, driven by a strong investment-speculation component,according to which investors have sought a safer and more traditional alternative toinvestments in financial markets. In addition to being very profitable, given thecontinuous rise in prices.

It does not seem reasonable that such growth, based on economic circumstances,will be sustainable in the middle or long term in the domestic market. In foreignmarkets, this will depend on the particular circumstances of each market, although itwill be difficult to find similar situations.

In the field of housing construction, a distinction can be drawn between thehousing market of second family dwellings, whose possibilities of development couldbe greater in Spain, owing to being a centre of tourist attraction. These possibilities aretied to the net growth of the individual wealth of citizens (Spanish and fromsurrounding countries), which also depends on the economic situation.

Abroad, it will depend on the location of geographic centres of leisure, tourismor business, or on the surroundings of the large cities, and also on economiccircumstances.

On the other hand, the increase in public construction, of a public or privatenature (hotels, shopping centres, etc.) depends directly on the economic situation. Inthe former case, this is limited by the pursuit of a zero State deficit. In the latter, by thepossibilities of achieving a return on investment, which the high cost of the land inSpain make difficult in the middle term.

Finally, there is the possibility that the improvement in the standard of living,materializing in the form of greater income, could lead to renewal of floor and walltiling that is old-fashioned or in bad repair, by more modern and better tiling.

This replacement market can occur, for private consumers, in the purchase of thesecond or third family dwelling in the course the consumer's life, in the pursuit ofimprovement of original qualities or renovation of the regular dwelling.

And in decisions of image enhancement and upgrading of facilities, for privatecompanies and public bodies.

This is a possibility that could of course display sustained growth, although itdepends on a positive evolution of the levels of income of the population and on aneconomic situation that generates no negative expectations.

Such renovation can also be partly driven by industry, by means of appropriatecommunication of the advantages of a greater rate of turnover in changing tilings inhousing or public buildings, somehow modifying users' scales of priorities.

However, it is certainly true that the industry has encountered other means ofpromoting growth, independently of the organic growth of its customary markets:

P.Gll- 115

CASTELL6N (SPAIN)

• Expansion into new geographic markets abroad.

• Broadening of the range of tile uses in the markets.

On the one hand we find that expansion into new geographic markets can not beunbounded, as these markets are finite. Moreover, this resource has been extensivelyexploited by the sector for years, so that considering the industry in general, there are fewnew markets left to discover. The industry is already present in the main economic areas ofthe globe.

Furthermore, there could be an increase in national competitors in foreignmarkets, together with the danger of price-based competition. And this has beengoing on until now, with a view to capturing market share from the reference Italianindustry. Similar intentions of other competitors from China, Brazil, Turkey, etc.,make such price-based growth very difficult.

Finally, the most advanced competitors are trying to promote growth in theirmarkets by seeking new tile applications and novel domains for tile installation,striving to position ceramic tile products in all fields of construction: architecture,town planning, interior design and housing.

However, the implementation of new applications and domains involvessubstituting other products and requires long-term work in order to alter habits andcustoms. Just as to foster a greater turnover in tile replacement.

Review of the factors that produce growth in the markets clearly shows thatorganic factors do not grow indefinitely, because they depend on economic situationsthat will not always be propitious.

And regarding the factors that we could call promoters, one factor, expansioninto new geographic markets, is displaying symptoms of exhaustion in the industryas a whole, while another, the introduction of new tile applications and domainsrequires both time and work, certainly on an institutional and international level.

In view of the above, this belief should not be very deeply rooted in the Spanishtile manufacturing industry, in spite of the extremely favourable economiccircumstances that have lately been in place, and which analyzed from a short-termsperspective could lead to unjustified optimism.

3.2. 2N D BELIEF: THE NON-EXISTENCE OF COMPETITIVE SUBSTITUTES

According to Levitt, the apparent solidity of growth industries was due to thesupposedly unquestionable superiority of their product, which 'Would thereforeproduce unbroken demand. There was no effective substitute. In actual fact, theproduct itself had surely been a formidable substitute of the predecessor it replaced.

The danger that this belief generates is that companies, aware of the superiorityof their products, come to be faced with the obsolescence of their products, without ----.1-~

having researched or developed other new ones that satisfy the changing needs ofconsumers. Or they realize this very late.

Our perception today as regards this belief in the tile manufacturing industry isthat, apparently (although reliable data on a world-wide level are unavailable), tile

P.GII - 116

CASTELL6N (SPAIN)

seems to have an advantageous position in respect of other competing materials,because of its technical properties and aesthetic possibilities.

In this sense, to the excellent technical qualities of ceramic tile are being addedthe aesthetic possibilities of other materials, imitating their colours, forms andtextures, etc. Right now, these are competing in consumers' minds with otheralternatives that had until recently been completely independent.

However, one matter is the perception of people tied to the sector, with theirlogical knowledge and attachment to the product, and another quite different matteris consumers' perception.

What we can say concerning thisbeliefis not that ceramic tilelackssubstitutes, sinceit hasman)!, but that tile surpasses these at the moment, at least in the view of people "in the know".

This is good news for the industry, because it means suitably communicatingthis advantage to consumers, although it needs to be borne in mind that a product orconcrete model is never free of obsolescence.

In this sense, Levitt indicates that there are no products free of obsolescence,because if (technical and market) research of the companies themselves do not causeits obsolescence, other companies will.

As an example, Intel, the world's largest manufacturer of microprocessors,believes that if it fails to rapidly outstrip its own products, other companies will. Intel,as all we know, has been market leader for many years.

To be sure, ceramic tile has substitutes. It may have certain advantages withregard to some of these, although the advances achieved in other industries areprobably not known, and this would require studies on an institutional level to detectpossible threats.

These advantages have certainly not been communicated either sufficiently orefficiently to consumers. And to get consumers to heed the excellent performancefeatures of tile requires ceaselessly disseminating the qualities of ceramic materialsamongst the various specifiers.

/

No products are free of obsolescence, and to avoid this requires ongoingdevelopment of more advanced products, with new performance features. /

Levitt indicates that the companies with the best outlook are those that constructtheir own luck and do not limit themselves to copying and following others. Thiscontinues to be so today, though to construct the future with criterion requiresunderstanding the grounds for success in the business. And these grounds are nowreferred to, in more or less general terms, as the key factors for success.

In order to innovate with success, it is necessary to know the key factors forsuccess. These factors to success refer to those essential ones which, though they mayalter with time, guide consumers and buyers in our markets when they are acquiringthe product.

We would therefore be aware of what consumers want, because we have askedthem directly.

P.GlI - 117

<ilt QUALI(O/G2004 CASTELL6N (SPAIN)

How many manufacturers truly know this? Those that understand the k~yfactors to success, not just today of course, but also tomorrow and the day after, willconstruct their own luck. The others will be led, and be forced to imitate.

If, in addition, these same companies head the development of futuresubstitutes, they will be laying the groundwork for a new stage in which they couldbe the leading players. In the same or in a different industry.

3.3. 3RD BELIEF: THE UNBEATABILITY OF MASS PRODUCTION

Mass production industries have an almost irresistible temptation to raiseproduction continuously. This is motivated, according to Levitt, by the prospect ofreducing unit costs by increasing production, which by counting on the sale ofproduction will generate higher profits.

The danger of striving for continuously lower unit costs of production is that it usuallyputs a spiral of pressure on sales and prices, if we are not in a market with over demand.

This is because cutting production costs is only interesting as long as productionis sold. Should this not occur, factories would be faced with undesired excess stocks.

Excess stocks involve higher store maintenance costs, repercussion of floor cost,labour costs, financial costs, etc., which make it difficult, if not impossible to reduceunit costs (although this reduction is strictly in the production process).

To avoid reaching this critical situation of excess stocks, companies usually tendto apply excessive pressure on sales. Which in passing increases sales costs.

This leads to completely prioritizing sales activities over other activities,particularly over marketing activity, which could become side-lined.

The sales department, faced with the insufficiency or absence of other productdifferentiating arguments (owing to the absence of marketing), makes a last-ditchattempt to achieve sales by competing on price. And this usually means just one thing:smaller profits. Despite production unit costs being smaller.

Is this a belief that could take root in the Spanish tile manufacturing industrywith all its negative consequences?

It is true that the ceramic tile manufacturing industry has invested very heavilyin production in the last decade to increase production.

In addition, high and increasing stocks are kept in many companies, signallingexcessive production orientation. There has also been increasing pressure on sales,above all in recent years.

And there has been insufficient investment in marketing. This explains the poorproduct differentiation and the high uniformity of manufacturers' product ranges.

The picture looks rather similar to the foregoing description.

The consequence of this belief is a price war between products with hardly anydifferentiation, which reproduces a terribly common situation in today's markets.

PCB - 118

CASTELL6N (SPAIN)

And the fact is that although it is sometimes difficult to distinguish betweenthem, there are radical differences between companies focusing on sales alone, andthose focusing on marketing:

• Sales-focused companies are obliged to sell at almost any cost in order to turnproducts into "fresh" money to feed the bank account, forgetting about themarket and marketing.

• Marketing-focused companies also sell, but they need to know the real (andchanging) needs of consumers to satisfy these with products that theconsumers want to buy, together with the related characteristics(presentation, time and place of purchase, payment terms, etc.).

Selling centres on the needs of the producer, whereas marketing centres on theneeds of the consumer. It is a critical difference in approach.

It might be useful now to briefly glance at the case of Henry Ford, founder of theautomobile company, paradigm of the creation of the production line (or mass production).

Levitt reminds us that Ford's true genius and the reason for his success did notlie in the development of mass production, but in an essential marketing insight. Thisinsight was that he could sell a great many cars, if he managed to set a sales price thateven his workers could afford, at a time when cars were luxury items.

From that objective need to achieve low sales prices, which a broad spectrum ofthe public could afford, came the implementation of mass production as a solution. Itwas not the other way around.

Regrettably, companies focused on mass production usually fall into decline,instead of growing: because the product ceases to adapt itself to the continuouslychanging needs and tastes of consumers.

And at present we face the added disadvantage, compared with the time whenLevitt wrote his paper, that tastes and preferences change ever more quickly.

Today the tile manufacturing industry is being forced to act in a direction counter tothis belief, suggesting that a step is being taken towards overcoming this misconception:increasingly shorter series are being fabricated, leaving mass production behind.

This gradual abandonment of mass production is due to the decision ofcompanies to offer a steadily wider range of products, and the intention of avoidingthe accumulation of large stocks.

However, this entails important cutbacks in productivity; which seriously impact thebottom line and will drive companies to seek other ways of propping up the bottom line.

3.4. 4TH BELIEF: THE OBSESSION FOR R&D

As we know, R&D is absolutely necessary to achieve innovation in a product, tomake it different from the others, or innovation in processes to generate adevelopment in productivity. Both features, differentiation and productivity, areimportant factors in corporate competitiveness. However, the belief to which Levittrefers is obsessively and uniquely confiding in this activity.

PCB -119

<lIt QUALICOYL2004 CASTELL6N (SPAIN)

The danger of which he forewarns us is that excessive attention towards ~&Dcan lead a company into believing that it is an efficient producer of excellent objects,rather than an organization whose mission it is to serve its clients.

Thus, companies develop great product quality or excellent new developmentsfrom a technical point of view, but in fact turn their backs on actual market needs.

At the root of this way of thinking and acting lies the belief that "a qualityproduct sells itself". And this is not always true, as German manufacturers can bearwitness at this very moment.

It is in such cases that conceptions spread within the company, which are morewidely held than might be imagined, concerning the client-consumer as anunpredictable, capricious, stupid, myopic, stubborn and generally annoying being.Nonetheless, it is he or she who buys. And, therefore is right. Was he not king? Theproduct satisfies the consumer's need, not the other way around.

Is this belief found in the Spanish ceramic tile manufacturing industry?

This situation does not seem to occur in the Spanish tile industry, given its lowinvestment in R&D. However, this low R&D investment is the general situation inSpanish enterprise. Investment in R&D does not mean investment in technology,which, as we have seen in the previous belief, has been abundant.

Decisions on investment in technology have not been strategic either in thesector, but have stemmed from the machinery and glaze producing companies, andhave followed the rhythm of innovation set by these branches, rather than imposingthis on them.

The problem is that technology is no longer a key factor for success, because itlies within everybody's reach, whereas R&D can indeed be such a key factor.

Regarding this belief, it would appear to be the case that the Spanish tilemanufacturing industry has not reached a sufficient level of investment in R&D forthere to be an excessive inclination towards this belief.

There is always a risk to be run, particularly by companies with large R&Ddepartments and extensive resources: namely, to spend too much time on trying toperfect the same product or, worse still, to perfect the manufacturing process in orderto produce the same item with greater productivity, without going beyond this.

The organizations we are referring to usually concentrate on what they know andcan control: research, engineering and manufacturing. In all the companies with anR&D component, which as we have already mentioned is essential, these tendencies dooccur. The important thing however is that they should be governed by another mainfocus: everything that is done must be market oriented, directed towards the consumer.

4. CONCLUSIONS

After the foregoing review, we can briefly summarize whether the mistakenassumptions or beliefs that Levitt referred to in his paper are present or not in theSpanish ceramic tile manufacturing industry.

PGB - 120

CASTELL6N (SPAIN) lilt QUALlCOk2004

I" belief: The myth of indefinite market growth as a result of population growthand improvement in the standard of living should not be very deeply rooted for thosewho observe the evolution of the sector from a broad perspective, not bound to acircumstantial economic situation.

2nd belief: The belief in the non-existence of substitute products does not appearto be present, since such products are abundant in the market, although there couldbe a certain hubris owing to the excellent qualities of ceramic tile and an ignorance ofthe advances in substitute products.

3rd belief: The unbeatability of mass production is a belief that we consider hasbeen present in the tile industry until quite recently. This may even still be the case insome companies.

4th belief: The obsession for R&D has not taken root, given the low investment inthis activity, though this is a deficiency of the Spanish industry in general.

Therefore, if the presence of these beliefs in a widespread form in the sector is thecriterion, fast and sudden decline of the sector is not to be expected in the near term.

However, it is certainly true that the industry has entered a stage of maturity, inwhich some companies that are not sufficiently flexible and fail to adapt quickly tonew market realities will falter.

What is this new reality?

In our opinion, over and beyond circumstantial economic situations (theexchange rate of the US$, an economic slowdown in key markets, etc), the tilemanufacturing industry faces challenges that will give rise to structural changesin the middle term. These challenges, amongst others, in our opinion are asfollows:

• To accept that emerging competitors are gaInIng market segments moreconcerned with price, forcing the industry to sell more up-scale products.This is independent of decisions regarding production outsourcing ordelocalization, which do not exclude the former and can lead to lower costs,but which only lie within the reach of companies with greater resources.

• To focus on those consumer segments concerned with other aspects than price,which seek more up-scale products or products that have greater value forthem. This requires developing a "multi-tier product", which offers additionaladvantages in terms of: quality, design, guarantee, after-sales service,trademark, etc.

• To accept that the market will probably demand of Spanish manufacturers asteady or even lower production, but with a greater value per square metre.

• To adapt more and better than competitors to the segments of preferredclients for the company, an evolution required by the rapid transition that hastaken place in the sector from a demand market (over demand) to a supplymarket (over supply).

• To increase the company's own capacity to find and develop new, differentand singular ideas to offer their clients, reducing the dependence on glazeand machinery manufacturing companies in this sense.

PCll - 121

CASTELL6N (SPAIN)

• To adapt to environmental regulations, promoting their use andcommunicating company respect for these regulations to consumers that areincreasingly aware of their environmental responsibilities.

There is still in the sector an excessive production or product, rather thanmarket, orientation.

For this reason, for the ceramic industry to transform itself into a group ofgrowth and innovating companies, it must convert its activity into a client-satisfyingprocess, in a broad sense, instead of a tile-manufacturing process.

It must begin to understand its clients and their needs more closely and better,and based on this understanding, develop in reverse form: creating tile products thatsatisfy those needs in the broadest possible sense for each group of buyers-consumers.Developing optimum and feasible ways of manufacturing these tiles. And finally,discovering the ideal raw materials for manufacturing these tiles.

In a word, companies must be more client oriented, understand client needs andbased on this, restructure their entire organization.

For this, the relation in the use of the factors must change. At present, 85% of atile manufacturer's workforce is directly or indirectly engaged in production. Can youimagine what could happen with 85% of the workforce engaged in marketing andR&D?

Let this not surprise you. At the huge IBM company, only 6% of the workers(315,000 workers) are engaged in a factory. The remaining 94% works in immaterialand intellectual services. And even that 6% is largely engaged in service tasks.

The good thing is that the changes that are taking place in the sector right nowpoint in this direction. Some companies are now beginning to move; a few alreadystarted quite some time ago, which makes them a model to follow.

5. COROLLARY

The foregoing all results in the demand for greater intensity in the use ofmarketing activities in companies. An investment that remains pending, particularlyif we take into account that the main asset of the industry is differentiation, in theentire market or in concrete niches (because to be leaders in costs is almost impossible,while to be avoided, no matter what, is hanging in the middle).

However, based on recent surveys, we suspect that the point is not thatcompanies do not want more marketing, but that companies may not be very clearabout what this is.

The question that remains to be answered is serious: do we not know exactlywhat marketing is or what it is for? Or: do we just reduce this to some operationrelating to advertising, trade fairs and little else?

Returning to the title of the present paper, perhaps the sector may not besuffering from myopia, but, and this is worse, it may not know what it has.

P.GII - 122