Posts Tagged ‘marketing’

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“Beating the Commodity Trap” – how, maybe, to beat back the zombies

Monday, March 1st, 2010

livingdeadCommoditization is a word that sends chills up the spines of CEOs worldwide. A commodity is a completely replaceable, fungible item, purchased from any of many suppliers, with prices depressed to not much above the variable cost of production. Yuck!

The strategies that companies have used to battle commoditization, like product differentiation and bundling, are themselves being commoditized. Private-label copycats and new competition from emerging markets are increasing the forces of commoditization. With all this comes the need to look at the problem anew.

beating the commodity trapRichard A. d’Aveni of Darmouth’s Tuck School of Business has produced a slim volume entitled, “Beating the Commodity Trap: How to Maximize Your Competitive Position and Increase Your Pricing Power,” that performs just such a task. The best part of the book is the framework it lays out for thinking about commoditization; the three “traps”:

Deterioration – in which competitors duplicate some or all of your value proposition at a lower price

Proliferation – in which various firms serve business niches that eat away at your market

Escalation – in which competitors increase value and reduce cost at the same time

d’Aveni goes on to describe various strategies to use if you find yourself in one of these traps. Probably the most successful example cited is Microsoft’s response to a proliferation trap, in which smaller competitors created add-ons to Windows to provide capabilities like media management, virus protection and (the most famous case) web browsing. Microsoft used its monopoly power to duplicate these features and include them in Windows for free, both making Windows more valuable and eliminating the market potential for these competitors (”overwhelming” the trap, in d’Aveni’s parlance).

Of course, despite d’Aveni’s rigorous analytical approach and his numerous examples of successful counter-commoditizing, reading about the many ways commoditizers attack industry leaders in “Beating the Commodity Trap” may leave you with the feeling you have when you watch “Night of the Living Dead.” Even when you think the zombies are defeated, more always emerge from the shadows.

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Two blogs you should read about the future of business

Tuesday, February 23rd, 2010

Two bloggers on Harvard Business Review’s website (http://hbr.org) in very different voices are helping to define the next era of business, post-crash. Umair Haque provokes and hyperbolizes, while Roger Martin writes sober, crafted prose, yet both say much of the same thing: business as usual – shareholder value maximization, “greed is good,” arbitrage- and exploitation-based commerce – needs to go. In its place will be socially-aware businesses that profit by garnering their workers’ best efforts and delivering distinctive, thick value to customers.

Samples:

Haque:

Hypercompetition — and hypercollaboration — is accelerating. The people formerly known as consumers are now your peers. Regulators have a keener eye and a longer arm. Stakeholders went from being hippie pacifists to shark-toothed activists. In this world, mere innovation and “strategy”are commodities. Globally, naked consumption must transition into durable investment. Meaning is the new cornerstone of advantage: Does what you produce actually make anyone meaningfully better off?

Martin:

as corporations have ballooned in size, the [CEO's] community has become far more impersonal and distant. Customers and employees have become more dispersed and distant and the home city has become less central — even expendable, as Boeing’s abandonment of Seattle demonstrated. And perhaps most important, a company’s owners have become a group of distant professionals who trade their holdings at the click of a button. Many large shareholdings, in fact, aren’t even managed by people.

Are they seers, or delusionists? I hope it’s the former. But you should read them both and decide for yourself.

Related posts:
Prior mention of Umair Haque
Posts mentioning Roger Martin

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Department of Brandular Deception – what is a Samsonite anyway?

Monday, January 25th, 2010

The old backpack briefcase had a hole in it, and it wasn’t healthy to carry 15 pounds of stuff on my shoulders anymore, so I searched online and found a great deal on a Samsonite rolling briefcase. It arrived late last week.

My wife said, “Does that have the Samsonite lifetime warranty? Sometimes when you get something that’s discontinued, they don’t have the lifetime warranty. You should check.”

Fast forward to today. I was moving my stuff from the old briefcase to the new one, and saw a card from Samsonite. “Thank you for purchasing a fine Samsonite product… our Samsonite product is backed with a Three-Year Limited Warranty…. While our products are handcrafted using the finest materials available, our warranty is not unconditional.” And then there were lots of exclusions and exceptions.

At the bottom of the card, it said the following: “Heritage Travelware, Ltd., 430 Kimberly Drive, Carol Stream, IL 60188-1804 USA under license from Samsonite Corporation.”

Scanned ImageThis explained a lot. There wasn’t going to be an unlimited warranty, because this bag, no matter what the label said, was not Samsonite. It was Heritage Travelware – whoever they are.

Behind this simple label is a well-worn yet risky strategy. After more than 90 years manufacturing its own luggage, Samsonite has decided to trade on that name by licensing it out to other manufacturers. Designers have been doing this for decades (sometimes, much to their chagrin), but for Samsonite it’s particularly risky. I didn’t really think Geoffrey Beene designed that Dopp kit I bought years ago at Marshall’s, but I wasn’t buying a Samsonite toothbrush here, I was buying luggage. I thought – I really thought – that Samsonite, the purveyor of the lifetime warranty my wife valued so much, made that case I bought.

But they didn’t. And the licensor offered its own Three-Year Limited Warranty in place of the lifetime one. Brands take decades to create, but can fall apart in a flash. The easy money offered by licensing can come at a price – the erosion of goodwill and trust that has been built up over the years. Let’s hope my new bag lasts long enough for me to forget it’s a “Heritage.”

[Below is what luggage companies used to promise, before Three-Year Limited Warranties.]

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Another glimpse into the sausage factory that is music industry accounting

Thursday, December 3rd, 2009

I am fascinated by the music business and how it totes up dollars and cents owed to various parties that contribute to making music I listen to every day.

Of course, it’s easy for me to be fascinated, as I don’t have to buy dinner or pay the mortgage with royalty checks from music I’ve made.

Recently, Tim Quirk from the band Too Much Joy posted a recent royalty statement that he received from TMJ’s former label, Warner Brothers. Even funnier (and more depressing) than the invoice itself is Tim’s essay describing how “unrecouped” bands (those that haven’t paid back their advances to the label) are treated and how cavalier (or malignant) the accounting is for those bands.

Tim now works at Rhapsody, so he knows how digital distributors account for the music they stream or download. As a result, he is able to poke holes in the corporate lackeys’ lame stories about why, for example, there are 12 outlets reporting sales for two of their albums but zero digital sales for a third album.

He is pretty humble, though, when he talks about bands like his who haven’t recouped their advances. Too humble, in my view. He takes at face value the label’s contention that they need to pay “money-making artists” like REM before they worry about giving minor bands an accurate accounting of their indebtedness. And, when you look at owing a label over $350,000 for albums you made more than a decade ago, it seems as if worrying about potential inaccuracy of a few tens of thousand dollars is pointless.

On the other hand, if the studios’ approach to measuring bands’ revenues is so cavalier and self-interested, I would have no confidence in the $350,000 number either. Who’s to say that’s accurate? Who’s to say, perhaps, that Too Much Joy shouldn’t be getting checks from Warners instead of hassles?

Here’s my favorite song from the band:

Too Much Joy |MTV Music

Another great reference on the artist’s perspective of the music business is Jacob Slichter of Semisonic’s memoir “So You Wanna Be a Rock & Roll Star.”

UPDATE 12/3: This essay by producer Steve Albini crisply lays out the situation bands face. In the hypothetical example he devises, a new band sells 250K albums and, somehow, still owes the label money!

(Hat tip Felix Salmon)

Related post:
Podcast: Fran Ten of West Indian Girl on the modern music business

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Customers who return products – not as bad as we thought?

Tuesday, December 1st, 2009

There’s been lots written about customers who deserve to be fired. “Bad” customers call customer service constantly, return products willy-nilly, and otherwise misuse the gifts that corporations bestow on them with their products and services.

But there’s another side to the story. By clamping down on returns (or even selectively penalizing “serial returners”), companies can depress their overall sales, write Andrew Petersen of the University of North Carolina and V. Kumar of Georgia State University in the most recent WSJ Business Insight section (”Get Smart About Product Returns“):

For every retailer, there is an optimal rate of returns. Higher returns, up to a point, have been shown to result in higher future sales. So if the rate of returns is too low, the retailer is missing out on potential sales. But if the rate of returns is too high, the costs to the company outweigh the benefit of the increase in sales.

Petersen’s and Kumar’s insights are based on their study of a large catalog retailer. They compared sales during a period with a liberal return policy with another period with a more restrictive return policy. In this brief podcast, Petersen further illuminates their findings. Lenient return policies caused purchasers to buy more, and also encouraged referrals, which were found to be extremely valuable. In the end, the amount returned by frequent returners (and the study found them – 5% of shoppers made 75% of all returns) was outweighed by the increased purchases from all other shoppers.

Retailers dwelling on getting ripped off by “serial returners” would do well to think about what their policies do to all the other customers out there, who end up buying somewhere else.

[Here's a little taste of the moral quandary posed by returning a product that you shouldn't.]

Related post:
Using customer returns information to improve products

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Customers are talking: here comes “Broadcast Shopping”

Tuesday, November 17th, 2009

This week Doc Searls posted on an idea called “Personal RFP.” In this model, people wishing to buy a product would be able to put together an open “request for proposal” – essentially, a specification for what they want to buy, including budget, and solicit bids from suppliers wanting to sell it to them. [Nothing even approximately like this exists today, except perhaps Priceline, the reverse-auction travel broker, which is full of compromises to the Personal RFP model.]

Scott Adams of “Dilbert” fame made a similar proposal, and he created a catchy name for this type of service. He called it “Broadcast Shopping,” and described it like this:

The standard shopping model needs to be reversed. Instead of the shopper acting as hunter, and the product hiding as prey, you should be able to describe in your own words what sort of thing you are looking for, and the vendors should use those footprints to hunt you down and make their pitch.

For example, let’s say you’re looking for new patio furniture. The words you might use to describe your needs would be useless for Google. You might say, for example, “I want something that goes with a Mediterranean home. It will be sitting on stained concrete that is sort of amber colored. It needs to be easy to clean because the birds will be all over it. And I’m on a budget.”

Your description would be broadcast to all patio furniture makers, and those who believe they have good solutions could contact you, preferably by leaving comments on the web page where you posted your needs. You could easily ignore any robotic spam responses and consider only the personalized responses that include pictures.

This is something kind of revolutionary. “Customers are talking” has meant, by and large, customers responding and reacting to what companies do to them. Companies release a product, change a service, or make a promise, and customers, through their stories, say what they think about that. Those stories influence other buyers, competitors, regulators, and (hopefully) the company itself.

“Broadcast Shopping” is talking, too, but it’s active, not reactive. The customer sets the agenda, and companies respond.

In Searls’ terms, it’s a type of “Vendor Relationship Management” system, as opposed to the Customer Relationship Management systems that many companies utilize today to help them sell and service customers.

There are many profound implications of broadcast shopping. One that comes to mind immediately is this: it will greatly reduce the benefit companies get from distribution scale. If I am asking people to supply me, anyone can respond. Today, I have to seek out suppliers, and the bigger they are, the easier (by and large) they are to find.

Using Adams’ example, a small provider of patio furniture, who could provide a set meeting his specifications, would be on par with Wal-Mart from a distribution standpoint – they each could respond to the Personal RFP.

Broadcast Shopping also undermines traditional branding. Because any company could respond to a customer request, many choices are available, along with information that allows customers to evaluate the proposals independent of the brand identity of the product.

Broadcast Shopping doesn’t exist yet. But Searls is convinced it will, and soon. He writes:

All this is not only do-able, but inevitable….

Google should be interested because Advertising in Reverse, or Broadcast Shopping (a term I love, by the way), will either undermine or replace the company’s standing business model (which pays for all those freebies we enjoy).

Microsoft should be interested because this could give them something Google doesn’t have yet.

Yahoo should be interested because they need something new that’s a winning idea. Amazon and eBay should be interested because they’re already in that business, though in a silo’d way.

Oracle should be interested because it will sell more databases and Sun gear.

Apple should be interested because it’s one more area where they can push for new standards on which the range of innovation goes through the roof.

Every retailer and intermediary should be interested because the promise of the Net for buyers is not an infinite variety of closed silos, but a truly open marketplace where any buyer can do business with any seller — and on the buyer’s terms and not just the seller’s.

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Marketing messages are simply another bee in the hive

Tuesday, November 10th, 2009

Cynthia Kurtz starts off a recent blog post with a provocative statement: “Telling a story is not always the best way to tell a story.”

She continues:

There are no green fields in the land of stories; every available spot is occupied and contested. There are no story-free environments. When a new story is launched into the world, the stories it meets do not simply watch as the newcomer descends; they rise to meet it and swarm around it in complex, unpredictable and sometimes baffling ways. If an idealistic metaphor for telling a purposeful story is pulling a lever or pushing a button on a compliant machine, a more realistic metaphor is sending a bee into a hive.

I want to talk about what this means for marketing communications, especially in today’s world of proliferating social technologies.

Marcomm people have always been tasked with creating messages that can inform the public utterances of the company – be they press releases, speeches, interviews, advertisements, etc. For simplicity’s sake, let’s call these things “stories.” Here are some examples of very brief stories that companies have told over the years:

  • Budweiser is the King of Beers
  • Chevy is the Heartbeat of America
  • GE brings good things to life
  • Wal-Mart: always the low price

Those are the most public messages, but there are others, not explicitly stated, perhaps, but nurtured and supported by the marcomm folks:

  • Nobody ever got fired for buying IBM.
  • A Mercedes tells people, “I’ve arrived.”
  • Cool people shop at Target.

The official messages have always encountered other bees in the hive. Protesters, in some cases unions, and the press have offered counterstories to the company story – although one could argue that the press has often swallowed the company message and regurgitated it whole. (Quick aside – for the longest time I was amazed by how news stories profiling a musical artist would appear just a couple of days before a new album hit stores.) Here are some counterstories you may be familiar with:

  • GE’s industrial pollutants have damaged the environment at certain places where they had plants.
  • Wal-Mart achieves cheap prices by purchasing goods from overseas factories that exploit their workers.
  • GM cars have poor fit and finish and aren’t fun to drive.

By and large, though, the hive was pretty empty. Corporate messages were transmitted, and seeped into our consciousness pretty much unaltered. This was because mass public communication was expensive and exclusive.

Now we live in a different world. The hive is buzzing with voices. Communication is cheap and easy. Blogging, Tweeting, Facebooking, Yelping, Amazon-reviewing, etc., etc. The counterstories fly fast and furious (read this one contesting an oft-reported statistic that Wal-Mart prices save American families $3,100 per year).

More than once, the other hive members have swarmed all over a corporate story and killed it. Remember the Motrin Moms fiasco, or the short-lived new Tropicana packaging?

Marketers, it’s time to stop trying to control your message. It’s time to stop believing that if you spend a lot of money buying advertisements, sponsoring sporting events or creating publicity stunts, that people will automatically believe what you say.

Instead, you’re going to have to earn your positive messages. Sell great products, service them well, provide outstanding value, thrill your customers. Listen hard to what they’re saying. The deep values they espouse in the stories they tell are your messages. Feel free to retell those stories in your forums. Look in the negative ones for clues to things you can improve, or markets you simply don’t serve well.

But, most of all, stop thinking you’re in control.

(Photo from direct dish via Flickr Creative Commons)

Related posts:
The “Values Proposition”
Tropicana hears feedback, brings back old carton
Marketers, stop shouting

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Department of dubious innovations: a brief history of the frialator

Wednesday, November 4th, 2009

pitcofrialatorI listened to a Fresh Air interview with “Omnivore’s Dilemma” author Michael Pollan and couldn’t get this passage out of my head (it comes 14′40″ into the interview):

But it’s very interesting to watch, as the amount of time spent cooking has fallen by about half since the 1960s, you know, obesity has risen dramatically. Now why should that be? Well, there is some very interesting research that correlates the amount of time that a culture spends cooking with its obesity rates, and that when you don’t cook and you rely on corporations to cook for you, you tend to eat more special-occasion food, things like French fries.

I mean, take the French fry. It’s a great example. I mean, the French fry did not become the most popular vegetable in America, which it now is, until corporations relieved us of all the work of preparing them. French fries are a whole lot of trouble to make. You’ve got to wash the potato. You’ve got to peel the potato, slice the potato, fry the potato and then clean up a kitchen that’s going to be a wreck. And, you know, you wouldn’t do that very often, and indeed, people didn’t do it very often.

But now, since corporations are making all the French fries, we can have them two or three times a day, and many of us do. So, you see, when there’s something built into the process of cooking that delays gratification, the work itself makes you think twice before you embark on a cake or French fries or fried chicken. And so as soon as you outsource that work, it becomes possible to indulge in all these special-occasion foods that no longer are special-occasion foods. They’re everyday foods.

And French fries wouldn’t be something we could eat two or three times a day without the Frialator. Rather than pouring oil into a pan, cooking, then discarding the oil, the Frialator allows restaurants to cook many dishes in the same oil, with only occasional filtering of the oil to remove food particles, until the oil is replaced, approximately one to two weeks in some cases.

The Beginnings
In 1918, New Hampshire restaurant equipment manufacturer J.C. Pitman and Sons created a revolutionary high-volume deep fat fryer. In this 1946 letter, company founder J.C. Pitman described the invention as follows:

In 1918 J.C. Pitman and Sons Hotel & Restaurant Equipment Manurfacturers, while attempting to work out a more satisfactory method of frying, made some important discoveries. One was that if the small particles of food which ordinarily settled to the bottom of the French Fry pot (where they collected and burned) could be kept away from the intense heat of that part of the kettle, the quality of fried food could be greatly improved. The Pitco Frialator was invented on this basic principle – and patented. This brought about a complete change in the method of deep fat frying. The fat medium was heated by tubes running through the center of the fat container. This construction permitted all sediment from the food being fried to drip below the heating tubes into a cool zone where it could not carbonize and break down the frying fat.

The importance of this construction is the reduction in fat costs, which exceeds by a wide margin the initial cost of the equipment, its depreciation and upkeep. Thanks to the thousands of Pitco Frialators now in use from coast to coast, deep fat frying has indeed become an art.

The Value Proposition
According to the Proceedings of the American Gas Association, Volume 20 (1938), a gas frialator costing $160 on average saved a restaurant owner $390 per year in oil costs.

Half a million or more in use in US
The National Restaurant Association reported that as of 2009 there were approximately 945,000 restaurants in the US. Estimating that at least 50% of these restaurants use a deep fryer, there are a lot of Frialators out there.

The Impact of “Special Occasion Foods as Everyday Foods”:
McDonald’s French fries have 380 calories per 4.1 oz serving. Eric Schlosser wrote in “Fast Food Nation” that “in 1960 Americans consumed an average of about eighty-one pounds of fresh potatoes and four pounds of frozen french fries. In 2000 they consumed an average of about fifty pounds of fresh potatoes and thirty pounds of frozen fries.” Thirty pounds of French fries equates to about 45,000 calories per person per year, using McDonald’s calorie counts. Meaning 307 million Americans (according to the US Census Population clock) will consume 13.65 trillion calories of French fries in 2009.

Thanks to the Frialator.

Photo: The Pitco Model 1

Related post:
A brief history of wheeled luggage

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Documenting and testing assumptions early is essential to good new-venture planning

Tuesday, October 27th, 2009

One of the most useful lessons in Rita Gunther McGrath’s and Ian MacMillan’s “Discovery-Driven Growth” is a basic one: when you’re planning a new business venture, your initial plans are laden with assumptions, and treating these assumptions as facts will get you in trouble. Yet it’s done all the time.

This lesson was reinforced in the nice interview with Rita that appeared in yesterday’s Wall Street Journal Business Insight section (”Learning from Corporate Flops“). The headline is a bit misleading – she talks less about learning from your flops than about carefully documenting your assumptions, testing them as early and cheaply as possible, and revising them when you learn they don’t hold up.

Having a detailed list of assumptions allows many people to weigh in on a new business idea – even if you can’t speak authoritatively on the whole concept, you may have very good insight on one particular assumption. And assumptions are expected to be wrong much of the time, so questioning one or showing evidence why it’s not valid is easy for the new product team to accept.

On the other hand, probing and questioning a business plan in which the key assumptions are buried and not distinguishable from known facts tends to invite emotional arguments which rarely improve the quality of the plan.

Related post:
On “Discovery-Driven Growth“

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Vendors Are Talking: Grocer is “not going to let someone steal my customer”

Friday, October 16th, 2009

Language, especially spoken language, is very revealing when it comes to someone’s values. This is why corporate executives are subjected to media training to keep them on message while speaking in public – meaning, of course, to appear to say something while not really saying anything.

Sometimes, however, executives defy their training and say what they’re really feeling. Let’s parse this recent statement from Stater Bros. CEO Jack Brown, from an interview as quoted in the Wall Street Journal. The Journal article concerns grocers who had cultivated a premium image, now feeling forced to cut prices to retain customers who are considering trading down to discount grocers:

We are scraping the bottom on prices. I’m not going to let somebody steal my customer, because when this (recession) is all over, I don’t want to go looking for my customer.

Brown’s words are property words. It’s akin to saying: “I’m not going to let someone steal my bike, because when this is all over, I don’t want to go looking for my bike.” Customer = his property. (You can’t get any less VRM than that.)

I’ve been reading the new book “Collaboration” by Morten Hansen, and he writes that executives who successfully collaborate practice what he calls “T-shaped management”: they manage down (their line responsibilities) and across (collaborative projects across the company). This may seem obvious, but, as pointed out in the 2008 book “Senior Leadership Teams,” senior managers are often promoted because of their ability to deliver results from their groups, not for being good at collaboration.

I’m more interested in interactions between companies and customers than within companies. Yet Hansen’s “T-shaped” concept also applies, I think, to succeeding in being a customer-centric company. An executive must understand the needs of the company (the vertical line of the T), and identify with the needs of customers (the horizontal line). She must balance both.

It probably goes without saying that getting angry for people “stealing” your customers, or the inconvenience of “going looking” for them, is focusing completely on the company and not at all on the customer. It’s I-shaped, not T-shaped, practice. And for a grocer, perhaps the ultimate consumer company, it’s reveals some old-school attitudes that won’t work well in the future.

Related posts:

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