Price increases portend industry disruption

A few months ago, I mentioned in my marketing strategy course at Columbia Business School that in most industries, real costs and prices decline over time.  Without getting too technical, the reason is either that manufacturing costs generally decline over time with accumulated production (the “experience effect”), global sourcing optimization reduces factor costs over time, technology disruption introduces inherently lower cost solutions, or some combination of all of the above.

The consumer doesn’t always see these effects at the checkout counter because the quality of goods and services continues to increase to meet rising consumer expectations.  For example, the base price of a Honda Accord in 1993 started at $13,800, equivalent to $22,207 in current dollars. Fast forward twenty years and the base 2013 Accord starts at $21,680.  So prices haven’t declined very much, but, over twenty years, for essentially the same price, consumers are getting a vehicle that is bigger, better handling, faster, quieter, more fully equipped, more fuel efficient and safer.  If consumers were willing to live today with the quality of vehicle offered twenty years ago, prices would indeed be considerably cheaper.

Of course in the high tech sector, consumers have benefited from both dramatic increases in product quality (speed, capacity, etc.) and dramatically lower costs.  Moore’s law has been good to consumers.

So are there cases where prices have gone up rather persistently, without commensurate improvements in quality?  The answer is yes and it’s worth exploring these exceptions, because such situations generally portend an ominous outlook for the companies involved.  If you’re in such and industry, enjoy it while you can.

As a general rule, when real industry prices are increasing, adjusted for quality effects, it indicates that the industry is undergoing a structural change in competitive dynamics.  Specifically, it either suggests:

  1. Industry structure has at least temporarily conveyed pricing power to current players, either because of high degrees of concentration, high customer captivity or both
  2. Industry disruption is eroding incumbents’ core business, inducing them to raise prices on remaining loyal customers to shore up revenues

Neither of these cases is sustainable long term, and you should expect inexorable pressure for quality-adjusted real cost and price reduction to reassert itself over time.  In the first case, increasing prices will attract more competition, undermining the pricing power incumbents temporarily enjoy.  And in the second case, low end disruption will inevitably overwhelm incumbents’ remaining business.

Let’s look at examples of both situations.

Industry Structure Effects

In the airline industry, it is well known that legacy carriers were unable to earn their cost of capital for the first three decades following industry deregulation in 1978. Bruising competition driving chronic over-capacity, exacerbated by disruptive low-cost carrier entrants resulted in massive shareholder value loss, liquidations, bankruptcies and industry consolidation.

But as consolidation reshaped the industry — the top four US airlines now account for over 80% of passengers flown — surviving players have finally been able to exercise discipline in capacity planning and pricing.  As shown in the exhibit below, airline fares have  reversed their long term decline,  as overall industry capacity has been scaled back.

Moreover, it should be noted that airline prices have been rising despite a decrease in product quality.  In particular, not only have airlines been raising prices for lower flight frequency, but they have simultaneously been significantly cutting service features that used to be gratis.  Not counted in the fare increases noted above are the fees now collected for checking baggage, onboard meals and reservation changes.  For some airlines, fees account for over a third of fare revenue.

These actions have had a salutary effect on industry profitability and stock price performance.  Over the past five years, airline stocks have increased in value by more than 3X.  But if airline fortunes continue to improve, expect new entrants to be attracted by favorable economics, which should moderate continued price increases and service cuts.

Raising Prices in Good Times…. And in Bad

The newspaper industry is interesting, because it demonstrates a case where the same company raises prices in good times and bad, for both of the reasons noted above.  In the first five years of the new millennium, the New York Times was enjoying an admirably strong competitive position.  Sure, print circulation had been essentially flat since 2000, but other newspapers were faring far worse.  Internet news was still in its infancy, (Google didn’t IPO until August of 2004), and the Times’ customer base of over 1 million subscribers were generally loyal and price insensitive.  For most Times readers, competitive news sources were considered unthinkably inadequate — an ideal case of strong customer captivity.

Not surprisingly, the Times exploited its strong position by raising prices.  Between 2001 and 2006, the Times raised print subscription rates by 24% nominally and by 9% in real terms, while revenues from news operations grew consistently through a 2006 peak of $3.2 billion.  These were good times at the Gray Lady!

But alas, as we now know, in the years that followed, the Times, as well as the newspaper industry as a whole,  suffered severely in a perfect storm of:

  • Severe declines in general advertising revenue from a deep recession
  • Internet-driven industry disruption, characterized by:
    >  Loss of highly profitable classified ads to Craigslist et al
    >  Loss of employment ads to monster.com et al
    >  Accelerating declines in readership, as internet news sources proliferated
    >  Accelerating declines in advertising revenues as ads followed readers to the internet.

To put a punctuation point on the severity of newspaper industry disruption, between 2005 and 2013, daily newspapers in the US lost 42% of its daily subscribers and advertising revenues declined by over 60%.

So what’s a disrupted company to do to respond to competition offering comparable products at lower prices  or, most often, for free?  As is often the case, disrupted companies raise prices despite (and in fact because) of sagging demand.  And that’s exactly what the New York Times did.  Between 2006 and 2013, for example, the Times raised home delivery subscription prices by 28% nominal and 11% real — a faster rate of price hikes than in better times.

Now of course, implementing price hikes alone is a bit like trying to hold back a disruptive flood by sticking a finger in a crack in the dam.  Ever-escalating subscription price hikes will only accelerate the migration to lower cost (and less profitable) online news formats.  And to their credit, the Times is working valiantly to find a post-digital business model to support its expensive news gathering operations.

But the fact remains, that if you observe a company persistently increasing real prices in quality-adjusted terms , it usually means that the company is already in the midst of, or about to become disrupted.

Other Price Hikers Facing Disruption

What are some other industries to watch out for that fall in this category?

Book publishers have been surprisingly reluctant to date to increase the price of hardcover best sellers.  But as ebooks continue to gain share, readers who continue to prefer the heft and feel of a paper book should expect to pay considerably higher prices, as digital disruption continues to take its toll on printing economies of scale.  On the brighter side, enlightened publishers may create digitally enhanced ebooks that create a higher consumer willingness to pay.

Health care costs have escalated far faster than the general CPI, and of course this sector has attracted considerable political attention in calls for industry restructuring.  As a nation, everyone agrees with the need to “bend the cost curve”, but agreeing on how has proven elusive.

But perhaps the most egregious case of price escalation portending industry disruption is in higher education.  As shown in the figure below, over the past three decades, tuition rate increases have outpaced the CPI by 4X, despite considerable evidence that the quality of education delivered has not improved.  There is both an economic and moral imperative for higher education disruption, which warrants further discussion unto itself.  Stay tuned.

Teachable Moments — The Curious Case of JC Penney

1 Reply

Let’s be clear; the world does not need another article pounding Ron Johnson for his ignominious fall from grace.  And so I won’t.  Except to use this painful episode as a “teachable moment,” rather than just gratuitous schadenfreude.

So what have we learned from JCP’s failed strategy?  In broadest strokes, it’s that a strategy flawed in both concept and execution has little chance to succeed. 

Let’s start with a reminder that JCP had to do something to change its game, which is why the Board reached out  to a proven executive who had helped transform retailing at Target and Apple.  Prior to Johnson’s arrival, JCP had become the somewhat dreary champion of promotion-driven selling, with predictably damaging impacts on the company’s financial performance and image   

  • JCP’s merchandising and product selection was undistinguished, arguably positioning their stores in the bland middle ground between WalMart and Target
  • JCP ran 590 sales promotions in 2011… more than10/week!  That takes a lot of flyers, and merchandise repricings and advertising and marketing dollars to hammer home a message that “our stuff is cheap!”
  • The average customer visited a JCP store only four times a year, which means that customers were ignoring 99 percent of JCP’s sales promotions.  The constant barrage of JCP promotions merely reinforced consumer expectations that no one pays full ticket prices at Penney
  • Almost three-fourths of JCP revenue came from products sold at a discount of at least 50 percent
  • JCP lost money in 2011 and only earned only a 2% net income margin in 2010.

Bottom line, JCP was broken and Ron Johnson was hired to fix it by reinventing a more imaginative and profitable reason than sales-du-jour for customers to visit their stores.

By all accounts, Johnson is smart, hard working and decisive and it didn’t take long for the new CEO to stake out a bold and transformative strategy, defined by three major initiatives:   

  1. Replace perpetual discounting with “fair and square” pricing, featuring far less frequent sales promotions
  2. Upgrade the cachet and style of JCP’s merchandise, with heavier emphasis on recognized quality brands of clothing and housewares
  3. Redesign the stores to showcase designer brands in a store-within-a-store boutique format

On the surface it’s hard to argue with the strategic direction and intent of Johnson’s strategy, except for three niggling details — a veritable trifecta of conceptual and executional flaws in the strategy:

  1. The company never demonstrated compelling evidence that JCP’s customers were clamoring for such changes
  2. Moreover, the company did not or could not articulate the benefits of its strategy in terms that were easily understood by consumers or, for that matter, stockholders
  3. To complete the trifecta, the company raced to implement its strategy on a national scale without regional pilots to iteratively test and refine new concepts

Now this is about the point in the story that most observers conclude that Ron Johnson was either clueless, reckless, or an idiot.  But we’re not going to pile on, right? 

So let’s try throwing Johnson another lifeline.  We’ve already noted that Johnson had to take bold, imaginative action.  And he’s certainly not alone in radically transforming a sick company by aggressively rolling out an ambitious but largely untested strategy.  For example, nearly thirty years ago, Nicolas Hayek raced to implement a national rollout of Swatch in the US, ignoring pilot tests indicating little consumer interest in his boldly fashioned creations from Switzerland.  And of course Steve Jobs was famously dismissive about the need for market research or pilot tests before launching massive rollouts of the iPod/iPhone/Tablet. 

Needless to say, Swatch’s and Apple’s product launches achieved runaway and enduring success.  And Ron Johnson was there, at Apple, close to the throne of the master! 

So little wonder that Johnson would take a page out of Steve Jobs’ (and Hayek’s) playbook to transform JCP by going bold, going big and going fast!!

So why are Jobs and Hayek regarded as geniuses and Johnson a goat?  Was Johnson just unlucky?  On the other hand, maybe Jobs and Hayek were just lucky, and not deserving of their reverential acclaim.  Bad luck or bad strategy; which is it?

I’ve run out of lifelines and can no longer cut Johnson any more slack.  The reality is strategy is contextual.  The fact that a  particular strategy worked well in one context most assuredly does not mean that it will thrive in another.  There are profound differences between the circumstances surrounding the launches of Swatch and Apple’s innovative consumer entries that simply don’t carry over to JCP’s situation.  An understanding of these differences — had JCP taken the time to think it through — would have indicated ex ante that JCP’s commitment to a rapid national rollout of an untested strategy was unwise, unnecessary and breathtakingly risky.

Let’s take the flaws in Johnson’s strategy one at a time.

1. The company never demonstrated compelling evidence that JCP’s customers were clamoring for its new strategy; and relatedly, JCP did not or could not articulate the benefits of its strategy in terms that were easily understood by its customers
What made JCP think that its consumers hated sales promotions?  After all JCP had trained their consumers for over 100 years to expect items on sale.  One could surmise that JCP catered predominantly to “bargain hunters” for whom finding an unexpected bargain was part of a game that its customers felt they could always win at JCP.  Ron Johnson changed the rules of a game that too many of his customer were enjoying and winning.  As same store sales stats soon confirmed,  customers either didn’t understand or didn’t like “fair and square pricing”.  Either way, they voted with their feet and not their pocketbooks to shop elsewhere.

So what is “fair and square pricing?”  I put this question to my MBA class this week, and as expected found that JCP had done a poor job clearly communicating its structure and intent.  One student correctly suggested that “it had something to do with less reliance on sales promotions.”  Fair enough, but to be effective, JCP had to not only say what they were not going to do, but also to clearly explain what made “fair and square” better than what consumers had become accustomed or at least inured to for decades.

And on that score “fair and square” pricing turns out to be pretty complicated and confusing.  Here’s a primer:

  • All merchandise starts a “Fair and Square” price tag ~40% lower than previously undiscounted sticker pricing
  • No prices will end in $xx.99… all items will now have even dollar pricing
  • Each month a new theme sale will be launched, where products related to a holiday or time of year get a “Monthly Value” discount below “Fair and Square” pricing
  • Either on the first or third Friday of each month, Monthly Value items that don’t sell will be further discounted at special clearance prices.

If simplicity and value were meant to be the cornerstones of redefining the JCP brand,  “fair and square” pricing as implemented falls confusingly short as transformative strategy.

In contrast, consider Swatch’s launch strategy which also was seeking to create a brand centered around value and style. With the acknowledgement that transparent pricing is easier to implement in a company with a few dozen rather than a few thousand SKU’s,  here’s Swatch’s pricing approach: 
All watches — no matter how popular, no matter how new to market, and no matter what rock star designer inspired the creation — will be priced at $40.  And that same $40 price tag will stay in force not for one month, or for one year, but for a decade.  The same simple price strategy extended around the world, with prices set at 60 DM in Germany and 7,000 Yen in Japan.

That’s how you create a brand that meaningfully conveys style and value!

One could also argue that by moving its merchandise focus upscale, further away from Sears and WalMart, JCP was distancing themselves from their core customer base in search of new clientele already well served by brands well known for higher quality merchandise — e.g. Macy’s, Bloomingdales and Target. 

Along with the new pricing scheme, did the JCP really think it its new merchandising strategy would gain more new customers than it risked losing during their strategic transition?  Apparently so.

2. JCP raced to implement its strategy on a national scale with no regional pilots to iteratively test and refine new concepts
As already noted, there are some inspirational examples of companies that also made big bets on untested big bang launches that paid off.  So why pick on JCP on this score? 

The companies cited earlier operated under three profoundly different circumstances that  do not apply to JCP.

  1. Apple and Swatch’s product launches were seeking to create NEW MARKETS that simply didn’t exist before.
  2. As such, even if their big bang launches failed, it would not alienate the company’s core customer base for existing products (e.g. Apple’s desktop and laptop computers; Swatch’s parent company’s luxury brands like Omega and Longines)
  3. The launches in question radically redefined their respective product categories. Nothing anything like the original iPod/iPhone/Tablet/Swatch existed before, necessitating an extremely aggressive launch campaign (in scale and marketing communications) to literally shatter consumers’ prior product perceptions.

Go down this list and you’ll see JCP’s strategic context was fundamentally different on every one of these elements. 

JCP was fighting for current market share within a well defined industry structure, not creating new markets.  It’s strategic direction clearly risked alienating its current core customers, and there was no particular reason that the strategy would have been seriously compromised by a more deliberate and staged implementation incorporating testing and iterative refinement.  After all, one could argue that Macy’s, Bloomingdales and Target were already occupying the very same space JCP was trying  to break into, so there was nothing particularly shocking or new about their brand aspiration.

Given JCP’s strategic context, Ron Johnson’s strategy reflected exceptionally poor risk management.  Ask yourself this: did the upside potential of a big bang success more than offset the downside risk of failure?  As viewed in this risk/reward assessment grid, the answer is decidedly not!


Lessons Learned

As a parting shot, two salient lessons learned emerge from the JCP story.

  1. Strategy is context sensitive   
    Before copying and applying a strategic plan that worked before, make sure the strategic contexts between the old and  new situation are closely aligned.         
  2. Strategy includes execution   
    I simply don’t buy the oft cited senior executive excuse that “my strategy was sound but the team let me down”.  CEO’s are responsible for delivering results.  If the CEO fails to fully anticipate and plan for implementation challenges — in terms of execution, technology risk and market acceptance risk  — then the strategy in question is flawed and incomplete.  A risk mitigation plan should be a part of every strategic plan to make it resilient and responsive to inherent uncertainties.  And remember, the bolder the plan, the greater the unknowns.  You better have a Plan B (and C) in mind, and a learning oriented culture before you take that big bang strategic leap.

We’ll never know whether Ron Johnson’s strategy would have eventually proved itself in the marketplace, but we do that he ended his career with a bang and unnecessarily put his company in grave peril.

What dogs can teach us about business

Leave a reply

Imagine this scenario.

Your 103 pound slobbering Labrador Retriever Goofy (name changed to protect the guilty) is sitting around the house one day bored and hungry — a perpetual state of being.  For no particular reason (is there ever?),  he jumps on the couch and stares at you with a self-satisfied grin.

“No! Off!”, you urge, but Goofy stands pat with a defiant tongue dangling well below his jowls.  Thinking you can outsmart the beast, you say: “Goofy, do you want a dog bone?”  Within nanoseconds, Goofy is at your side, drooling helplessly as you dig a dog bone out of the bin.

The next day, Goofy is once again bored and hungry and looks expectantly at you for a treat. But alas, you’re too busy pounding out text messages on your iPhone. Then Goofy gets an idea — when it comes to food, he’s shrewd — and repeats yesterday’s transgression.  The plot replays like groundhog day.

Congratulations!  You’ve just trained Goofy to jump on the couch whenever he wants a dog bone, which is, like, all the time.

This is of course a case of incentivizing the wrong behavior.  And business leaders make this same mistake at least as often as dog owners.  Why?  There tends to be a couple of reasons:

1. Unintended consequences of well intentioned but misguided incentives

The first explanation is the most benign.   In these cases, managers simply fail to think through the logical consequence of their directives.

In retrospect, you may think some of these examples are ludicrous knowing in advance that I’m highlighting incentives that backfired, but I can assure you that each of these situations draws on real world examples — and there are plenty more to choose from.

  • Consider first the case of a new CFO who joins a high tech company to bring more discipline and financial accountability to the product development process — a  critical determinant of corporate success.  By way of background, assume the company had previously been quite sloppy, carrying too many dead-end projects for too long, avoiding clear accountability for market outcomes and lacking a clear methodology to prioritize projects in the development pipeline.
    To ensure a more rigorous process, the CFO declares (with CEO backing) that he will not approve any new project with a payback longer than two years while simultaneously suspending funds for any current program in development for more than three years without a saleable product.  Furthermore, the CFO announces that he will strictly apply IRR measures to prioritize surviving projects and require any approved project’s rate of return to exceed the company’s hurdle rate of 25%.
    “I know there will be some pain in implementing these new rules, but there’s nothing like some quick wins to demonstrate the benefits of our new disciplined approach”, declared the CFO in announcing the new program.  Now you can’t fault this CFO for ambiguity.  He certainly laid his chips on the table.  But it didn’t take long for the new evaluation metrics to heavily skew the company’s development efforts towards near term incremental product improvements, rendering the company highly vulnerable to more ambitious game-change disruptive product initiatives from competitors.

The trouble with incentives is that they work, and the unintended consequences may be far worse than the benefits initially sought.

  • Another example involves incentives that unwittingly train consumers to behave in ways that harm business performance.  For example consider the case of a B2B company that incentivizes its salespeople to meet quarterly sales quotas while discounting prices as necessary near the end of each quarter to meet revenue guidance for Wall Street.  It doesn’t take long for salespeople to learn that it will be a lot easier to sell products with end-of-quarter discounts and it takes even less time for customers to learn that they’ll get a much better deal by holding off purchases until salespeople are desperate to hit their sales quotas.  This is a perfect example of the dog-on-the-couch scenario, because this company has essentially trained its customers to behave badly.  The net result is highly peaked sales patterns with resulting strains on manufacturing operations, cost and quality,  excess inventories and customer addiction to discounts.  The sad thing is that customers probably wouldn’t have figured out how to game the system on their own; they needed misguided corporate incentives to teach them!
  • JC Penney is discovering that once customers have been incentivized to behave badly, it’s very hard to retrain them.  For decades, JC Penney used a variation of the B2B example above to train customers to buy primarily on weekly promotion days.  When a new CEO arrived on the scene in 2011 and replaced JC Penney’s longstanding reliance on promotion-based selling with purportedly “fair and square” every day low  prices, customers  abandoned the company in droves.  Moreover, despite the radical change not only in their pricing and merchandising policy, but even in the 100+ year old company name — now known simply as jcp –  the company has been unable to attract nearly enough new customers with their uncharacteristic emphasis on quality and value.  In Q4, 2012, jcp’s same-store sales declined by a staggering 32%, year-on-year.  Apparently, the dogs aren’t eating the new dog food!
  • As a final example, perhaps the earliest recorded case of unintended incentive consequences dates back to colonial India, where the ruling British government became concerned with the growing number of  venomous cobras infesting Delhi.  A well meaning government official came up with the scheme to pay any citizen a monetary reward for each cobra carcass.  At first, the program appeared be a tremendous success, as huge bounties were paid for scores of dead cobras.  But citizens continued to complain about ubiquitous snakes lurking in Delhi, and a cobra census was commissioned to confirm that there indeed appeared to be no change in the urban cobra population!
    What could explain such a disconnect?  Well, it turns out that enterprising entrepreneurs had built cobra breeding farms on the outskirts of town for the sole purpose of claiming the generous bounty — a far easier task than actually hunting for snakes in Delhi!  When the government became aware of the ruse, the reward program was scrapped, causing cobra breeders to set the worthless snakes free. Delhi wound up being inundated with even more venomous snakes than before the program began.  The eponymous “cobra effect” has become a poster child of misguided incentives with unintended consequences.

The antidote to unintended consequences is to carefully think through how all potentially impacted stakeholders, including those who do not share management’s intent will react to new incentives.  In each of these cases, executives imputed their values and intent on stakeholders — employees, citizens, customers — whose behavior was in fact motivated by very different objectives.

2. Disingenuous unwillingness to incentivize allegedly desired behaviors
Dogs learn early on to watch what their owners do, not what they say.  They are after all, dogs.
A common example of this same phenomenon in business is when executives disingenuously say the politically correct thing about their priorities but blatantly and knowingly incentivize contrary behaviors.  Examples abound.

  • Consider the car dealer whose advertising slogans tout “customer satisfaction is our number one priority”, but salesmen’s bonuses are strictly based on total gross profit, with an extra generous spiff going to the salesperson achieving the highest grossing sales transaction each month.  So where it counts — in employee pocketbooks — such dealers are encouraging their salespeople to “rip customers’ eyeballs out” as the cynical trade jargon goes, while pretending to promote customer friendly business practices.
  • Further up the value chain, some car manufacturers have also averred unabashed commitment to customer satisfaction, only to preferentially allocate their hottest selling cars — a prized incentive — to dealers with the biggest order bank, irrespective of track record on customer service.
  • Another common example relates to enterprises that operate two distinctly different business models under one roof, but skew valued incentives to support just one of the business functions.  Many top tier research-oriented universities are a case in point.  Such institutions proudly proclaim their commitment to groundbreaking research and  educational excellence.  And there is no reason to doubt that college administrators truly would like to excel at both.  But tenure track faculty  quickly learn that promotion criteria are heavily skewed towards research achievements over teaching excellence.  So where it counts — the marginal allocation of faculty time –  research takes precedence over teaching effort.

The trouble with incentives is that they work! If dogs can figure out how to interpret and respond to incentives, customers and employees certainly can as well.  In each of the examples cited above, canine and human stakeholders learned to watch what management rewards and not what they say.
When there is a clear disconnect between stated objectives and incentivized behavior, institutions lose credibility and authenticity in the eyes of their customers and employees.
********************************************
As I put the finishing touches on this blog entry, my Labrador Retriever is besides me, where else, but on the couch.  My protestations not withstanding, I lost credibility a long time ago on canine couch rights with my misguided incentives.

Are You Ready for Big-Bang Disruption?

Leave a reply

In their excellent Harvard Business Review article aptly titled “Big-Bang Disruption”, Paul Nunes and Larry Downes make the case that disruptive new entrants will radically transform more industries far faster than originally envisioned by Clay Christensen in his landmark treatise on this subject 18 years ago. 
The authors attribute the accelerating pace and scope of disruption to:

  • The increasing role of IP rather than physical product attributes in creating disruptive product performance gains
  • The substantial decline in IP-driven development costs as inventors exploit  off-the-shelf SAS technologies and cheap server and storage capacity to create new product mashups at breakneck speed.

Take Twitter for example, born out of a daylong brainstorming session, launched in alpha form within days and released to the public within four months, this information sharing platform has disrupted newspapers and national governments in ways which could not have been easily foreseen.  Or consider the plight of dedicated GPS navigation device makers Garmin and Tom Tom whose market has been obliterated by the explosive growth of smartphones equipped with Google’s free map app.


With respect to how the new generation of disruptors are likely to impact incumbent market leaders,  Nunes and Downes warn: “You can’t see big-bang disruption coming. You can’t stop it. You can’t overcome it. Old-style disruption posed the innovator’s dilemma. Big-bang disruption is the innovator’s disaster. And it will be keeping executives in every industry in a cold sweat for a long time to come.”
If you accept this premise (as I do), it leads inexorably to the question every company should be asking themselves: are we innovative enough to be the disruptor and not the disruptee in the next wave of transformational change in our industry?  While there are a number of diagnostics designed to test whether companies have a culture conducive to promote innovation, there is one salient indicator that warrants particular attention: how does your company deal with “truth-tellers”?
Nunes and Downes define truth tellers as “internal or external seers who can predict the future with insight and clarity. In every industry there are a handful of these visionaries, whose talents are based on equal parts genius and complete immersion in the industry’s inner workings.  They may be employees far below the ranks of senior management, working on the front lines of competition and change. They may not be your employees at all. Longtime customers, venture capitalists, industry analysts, and science fiction writers may all be truth tellers.”


Truth tellers play a particularly important role in presaging the need and opportunity to develop new business models which disrupt incumbent business positions, long before the need to change becomes obvious (by which time it’s often too late to stop the destruction of your business by a disruptive newcomer). 
By their nature, truth-tellers make most business leaders uncomfortable:

  • Truth tellers are often eccentric, and their conviction can easily be mistaken for arrogance and stubbornness
  • They generally have no respect for current achievements which are a source of considerable pride to top management (e.g. “we are the global market share leader!”, “our sales topped $5 billion last year!”)
  • They don’t think/talk/act like “team players” in top management
  • They argue with passion and conviction, but lack the thick binders of market research that management has come to expect
  • They convey a message that is threatening to the organization. Believing it — even a little bit — requires a willingness to contemplate highly disruptive, unpopular and risky changes to the established order
  • Truth-tellers’ view of the world creates FUD on steroids!

Most corporate executives thrive on the ability to manage their business in an orderly fashion — to harness the firm’s resources to deliver predictable, reliable and steady earnings growth.  Unfortunately, there is nothing orderly or predictable about big-bang disruption, and companies who ignore early signals foretold by truth-tellers do so at their peril.Thus how executives deal with truth-tellers is actually a good indicator of whether a company is likely to exploit opportunities as a disruptor, or be flattened as the disruptee. 
Sadly, over a long career in senior management consulting, I’ve witnessed far too many cases where executives not only fail to continuously seek the counsel of truth-tellers, but rather willfully prevent such voices from being heard and evaluated within the organization.
What are some of the mechanisms executives use to stifle truth teller input?:   

  1. Ignore/dismiss/deny access
    The first line of defense is against dissonant ideas is simply to ignore, dismiss or deny access of truth tellers to the executive suite.  In too many cases, executives simply  deny any forum for truth tellers to air their views.  They are not invited to executive conclaves, their emails are ignored and if a truth teller does manage to lob in a point of view on disruptive threats (or opportunities), their views are publicly rebuked as quackery.  The upshot of course is truth tellers will find other forums more receptive to their views, including jumping ship to other companies who may emerge industry disruptors

  2. Grin-f*#k truth tellers
    When the voices of truth tellers become too loud to ignore, some executives move to a second line of defense.  With apologies to PC readers, grin-f*#king is a common and insidious technique to discount the input of truth tellers, while creating the illusion of responsiveness.  GF’ing is defined as  “when someone in business smiles and shakes your hand assuring you that they have heard and will act upon your ideas or concerns when in truth you have already been ignored and dismissed.”  The first time a truth teller gets GF’d, he or she may fall for the ruse of feigned responsiveness.  But actions speak louder than words, and persistent truth tellers soon learn to recognize when they’re being GF’d rather than taken seriously.

  3. Create task forces to reinforce status quo behaviors
    The final line of defense of the established order in the face of an inherently uncontrolled disruptive threat is to establish a task forces stocked with “team players” who can be counted on to limit the strategic assessment to safe choices within the organization’s comfort zone.  Such task force initiatives are often publicized with great fanfare as a testament to a company’s commitment to cutting edge innovation.  But in reality, these companies are confusing activity for progress, and by design, task force initiatives wind up reinforcing the status quo.

If you see some or all of these behaviors in your organization, be afraid; be very afraid.  Big bang disruption is likely to be lurking sooner than you think and will take your company by self-imposed surprise.

When Being Good Isn’t Good Enough

Leave a reply

The New York Times carried an ominous story this week on the souring outlook for  Barnes & Noble’s Nook business, portending perhaps its exit from the e-reader and tablet markets.  The Nook’s decline comes despite its technical competence and the recent infusion of $600 million of capital by Microsoft.

As the Times notes, “going into the 2012 Christmas season, the Nook HD, Barnes & Noble’s entrant into the 7-inch and 9-inch tablet market, was winning rave reviews from technology critics who praised its high-quality screen. Editors at CNET called it “a fantastic tablet value” and David Pogue in The New York Times told readers choosing between the Nook HD and Kindle Fire that the Nook “is the one to get.”

Unfortunately, high marks from pundits didn’t translate into sales.  Nook sales stalled over the Christmas season, losses mounted and profit and revenue guidance has been reduced.

What happened?

The Times article shares this explanation: “In many ways it is a great product,” Sarah Rotman Epps, a senior analyst at Forrester, said of the Nook tablet. “It was a failure of brand, not product. The Barnes & Noble brand is just very small.”

I beg to differ.  The Nook’s problems go far beyond B&N’s brand strength. There are three fundamental reasons for Nook’s failure that have implications for any company (and eventually this means every company) facing technology disruption:

  1. Demise of single-purpose devices
    The Nook was initially developed as an e-reader, i.e. a single-purpose device.  So too were digital cameras, wristwatches, travel alarm clocks, miniature flashlights, GPS navigators and Apple’s iPod.  The demand for each of these products has been decimated by all-encompassing smartphones and tablets, which include good-enough or better performing apps, often for free.

    For example, if you’re Garmin or Tom Tom trying to sell a standalone GPS navigator for $120 against a free Google Maps app on an Android or iOS smartphone, good luck to you!  Each of these product categories has suffered steep sales declines in the face of multi-function mobile devices.While purists may argue that purpose-built e-ink e-readers like the Nook Simple Touch (pictured above) has better readability in bright sunlight and longer battery life than tablets, I sure wouldn’t want to bet my business on these advantages against the relentless improvements (lighter, brighter, faster cheaper) in mobile devices from industry leaders.

    Undoubtedly this is why Barnes & Noble bet a lot of their own and Microsoft’s money to develop their own tablet devices.  But if oddsmakers were handicapping the tablet race between Barnes & Noble, Apple, Samsung, Google, Amazon and Microsoft, I think it’s fair to say that a bet on B&N would be a prohibitive longshot.  When it comes to dedicated e-readers, the market may be big enough to profitably support one major supplier, but that will be Amazon, not B&N.

  2. Disruption redux
    More broadly the Nook story is yet another example of how disruptive technologies transform value chains, destroying incumbents who no longer create value in the new industry order.  With the advent of e-reading devices and digital publishing, book retailers and publishers are severely threatened. We’ve been to this dance before in the music industry, where incumbent retail leaders were essentially wiped out.

    For a variety of reasons, bookstores (if not the Nook) are likely to survive for quite some time, but only at a fraction of their former scale.Was B&N’s decline inevitable, given the transition from print to digital books?  One could ask the same question of Amazon, whose dominance of book sales on amazon.com was equally threatened by e-reader technology.  But to Jeff Bezos’ credit, Amazon chose to disrupt itself by aggressively launching the Kindle business, which quickly established itself as the dominant digital book platform.  By the time B&N responded with its own Nook devices and e-bookstore, it was too late.The willingness to disrupt one’s own core business before someone else does it to you is a hallmark of inspired leadership.

    Bezos rules.

  3. Stuff Happens!  What’s up with Microsoft?

    As a play on the well known adage, “Disruption Also Happens”!  In every industry, the question isn’t whether but only when.  The only way to  survive and prosper through successive waves of disruption is to be the disruptor, not the disruptee!One would think Microsoft would have learned this lesson by now.  Over the past decade, Microsoft has managed to miss five of the most transformative disruptions in the high tech sector:

  • Internet Search
  • Mobile Devices/Apps Ecosystems
  • Social Networking
  • Cloud-based SAS
  • Tablets

    To add insult to injury, Microsoft has tried to cover their innovation lapses with a series of über acquisitions and/or investments (>$500 million) in companies who themselves have lost the disruption race and/or have failed establish a viable business model.

    Cases in point include:

  • Yahoo ($44.6 billion failed acquisition bid; ~2X Yahoo’s current market cap)
  • Nokia (>$1 billion invested in partnership deal)
  • Nook ($600 million invested for equity stake in Nook spinoff)
  • aQuantive ($6.3 billion digital marketing acquisition, since fully written off)
  • Skype ($8.5 billion acquisition)
  • Yammer ($1.2 billion Social Networking acquisition)
  • Dell (>$1 billion investment offer pending for LBO deal)

——————————————————————–
Bottom line: Serial innovation is the only proven antidote to the accelerating pace of disruptive technologies.  It certainly looks like Barnes & Noble and Microsoft have not been up to the task.

Is Apple losing its mojo?

Leave a reply

The Genius of Apple

On June 11, 2012, Tim Cook graced the cover of Fortune Magazine, in a hagiography
about the man with perhaps the hardest job in America: to succeed the legendary
Steve Jobs who Fortune had already lionized as “the best CEO of the decade” and
“the best entrepreneur of our time”.

 

As the Fortune piece noted: “Considering the widespread handwringing over how rudderless
Apple would be without Jobs, it is remarkable how steadily the company has sailed along without him.”  Time Magazine also weighed in with similar praise: “Highly ethical and always thoughtful, he projects calmness but can be tough as nails when necessary. Like the great conductor George Szell, Cook knows that his commitment to excellence is inseparable from the incredible ensemble he leads at Apple.”

Such plaudits certainly seemed warranted at the time. When Fortune’s story appeared, Apple was trading at $571 per share, 52% higher than when Steve Jobs stepped down 10 months earlier.  Apple’s stock and was well on its way to cresting at over $700/share in the coming months, prompting Forbes and the New York Times to speculate that Apple — already the most valuable
company in the world — was well on its way to becoming the first trillion dollar market cap company.

These were heady times indeed, and Apple and Tim Cook apparently could do no wrong.

Or could they?

Apple’s fall from grace

Less than four months after the Times wondered how soon Apple’s market cap would break the trillion dollar mark, the Wall Street Journal ran a story under the headline “Has Apple Lost Its Cool to Samsung?” CNN had already scooped the Journal, with its own version of: “Is Apple Losing Its Cool Factor?”

And what about Tim Cook, the Szell-like conductor of Apple’s innovation band? In mid-January, The Motley Fool asked “Is Tim Cook The Next Steve Ballmer?” which was not meant as a
compliment. And two weeks later, Forbes Magazine weighed in with “The Problem with Tim Cook“, raising serious questions about whether Tim Cook was up to the job!

What’s going on here?!  Sure, there were a couple of missteps with Apple Maps, perceived missing features in the iPhone 5 and the still-unfulfilled promise of Apple iTV.  But these events hardly seemed damning enough to signal a cataclysmic reversal of fortune.

Can Tim Cook and the company he leads really go from a heavy dose of smarts to serious ineptitude in just four months?  Has Apple really lost its mojo and its cool to Samsung, who for so long toiled in the obscurity of Apple’s giant shadow?

The Halo Effect

Earl Weaver, the Hall-of-Fame manager of the Baltimore Orioles twenty-five years ago opined an answer to these questions, which is as true in business as it is in baseball:

“You’re never as bad as you look when you’re losing, nor as good as you seem when you’re winning”

There is actually considerable academic research validating Weaver’s sage advice, that falls under the rubric of “The Halo Effect”. In IMD Professor Phil Rosenzweig’s excellent book of the same name, the Halo Effect is defined as the consistent tendency for people to ascribe positive ratings (particularly on subjective assessments like “executive vision” or “leadership”) when the overall measurable performance of a company is good, while tending to be overly critical of management when business outcomes display signs of weakness.

One can see this for example in the glowing praise of successful business leaders (such as Reed Hastings of Netflix, Fortune’s 2010 CEO of the year) as “visionary, dynamic and customer-focused”, only to have the very same CEO widely vilified as “complacent, arrogant and unwilling to respond to customer preferences” one year later when the company’s financial performance stumbled. The Halo Effect probably hit bottom for Hastings when SNL parodied him in a bitingly funny skit in 2011.  ABB’s Percy Barnevik, GE’s Jack Welch and Groupon’s Andrew Mason are other examples of executives who have felt the sting of hyperbolic punditocracy.

It’s fair to say that Tim Cook is the latest victim of the Halo Effect – neither worthy of his early sanctification, nor deserving of his asserted fall from grace. As usual, the business press has been too quick to praise and condemn a man who, in reality has not changed the very essence of his being in just four months!

Let’s get real

So what can we expect from Apple in the months and years ahead? In my view, there are two parts to answering this question:

  1. Apple has done nothing yet under Tim Cook’s watch to fundamentally call into question his leadership of the company or the potential for attractive growth
  2. Having said that, the gut-check question for Cook remains the same as it would be were Jobs still leading the company: can Apple continue to profoundly redefine the value
    proposition in large new sectors of the economy?

It is no secret that Apple’s extraordinary growth over the past decade was propelled by the sequential breakthrough success of the iPod, iPhone and iPad.  Each of these products succeeded in realigning the value chains of multiple large industries, creating enormous profits for Apple.

But as good as any of these products are, the simple fact remains that over time, continued improvements yield marginally decreasing utility to consumers.

Take Apple’s biggest success to date for example, the iPhone.   When the first generation iPhone went on sale in the summer of 2007, it was received with unprecedented global enthusiasm, teasingly dubbed by The Economist as “The Jesus Phone”.  And no wonder…it’s design, user interface, functionality and apps support were so radically different and better than any other smartphone on the market that it appeared to many to be miraculously conceived!

By the time early adopters’ initial two-year contracts were up, Apple had unveiled its next generation iPhone, the 3GS with faster digital download speeds, an improved camera and considerably more apps.

And in every year thereafter, Apple continued to enhance the iPhone.  The iPhone 4/4S/5 got
progressively, thinner, lighter, brighter (displays), faster, better (cameras), and eventually marginally bigger. While each new version was better than the last, none had the breakthrough market impact of the initial iPhone.

Economists have long recognized the marginal decreasing utility – more prosaically, the “wow” factor — associated with virtually every product in the market over time.

For example, except for the most extreme technophiles, most consumers hardly notice the latest generation PC, home printer, digital camera or even automobile these days – a far cry from when the first primitive versions of these revolutionary products first hit the market.

Seen in this light, the fact that Apple’s latest iPhone lacks NFC capability or the best-in-class
screen size or the highest megapixel camera does not necessarily signal the end of their
innovative spirit.  Even if an iPhone 6 were released tomorrow with all of these features, it would fail to create the buzz of the first “Jesus Phone”.

Relatedly, it’s entirely to be expected that Samsung and others have largely caught up to Apple on most of the features and functions that define state-of-the-art smartphones.  If you have any doubt whether this is a unique failing of Apple, just ask BMW how they would compare their vehicles to the best Hyundai has to offer today vs. ten years ago. Competition happens, and no one is suggesting that BMW has lost its edge.

Where now?

So what will it take for Apple to continue to be, well, Apple?  Its unique challenge is not just to stay abreast of the relentless demands for continuous improvement in its current core products — daunting enough against competitors like Samsung, Google and Microsoft. It is to find the next breakthrough product category that will once again disrupt a large business value chain to Apple’s profound benefit. A rumored rendition of an Apple “iTV” home entertainment ecosystem is probably the most likely possibility.

Critics of Apple should realize that epic business disruptions do NOT operate on a predictable product release timetable, and it is clearly premature to condemn Tim Cook for not pulling another blockbuster rabbit from under his hat during his eighteen months as CEO.

Expecting Tim Cook to continue Apple’s growth to unprecedented levels on an arbitrarily imposed timetable is simply not a reasonable standard by which to judge CEO performance.

While it is still too early to pronounce judgment on whether Apple’s astonishing string of revolutionary product launches has run its course, the clock is definitely ticking.

 

Blowing up old habits

1 Reply

Businesses are constantly seeking new products, services and business models to create widespread market appeal.  But one of the mistakes innovators often make is underestimating the challenge of getting consumers to change their behavior and beliefs in order to realize the benefits of a promising new product.
Numerous tomes have been written on overcoming this challenge, perhaps most notably by VC Geoffrey Moore, who shares his wisdom on how to move beyond early adopters to reach the mass market in his 1991 classic, Crossing the Chasm. Spoiler alert: Moore notes that most new technology ventures fail to get across the abyss!
So how do companies that launch businesses requiring the marketplace to radically rethink their preconceived notions of product attributes get consumers to change their beliefs and behavior?  For starters, successful products of this type — either high or low tech — must inherently have a killer value proposition — e.g. the original Apple McIntosh or Timex watch.
But the fact remains that lots of products with breakthrough potential fail to gain market acceptance.
One of the key lessons learned from a number of products that have crossed the chasm to widespread market appeal is the use of jarring advertising campaigns with explosive imagery to literally blow up consumers’ comfort with old habits and category norms.
Here are some of the best examples:
1. The Apple McIntosh Launch, 1984
In this iconic commercial, considered by many to be the best TV spot of all time, a renegade female warrior hurls a sledgehammer that explosively shatters an IMAX-size screen image of an Orwellian dictator, thinly disguised as the leader of the Microsoft evil empire.  A picture is worth a thousand words, so if you haven’t seen this ad recently, check it out at: http://www.youtube.com/watch?v=HhsWzJo2sN4.

Adding to its mystique, this ad was broadcast only once, during the 1984
Superbowl.  YouTube views since measure in the millions.
—————————————————————————————————————
2. The Timex Watch Launch, 1951
In 1951, Timex introduced the world’s first low priced, highly reliable/rugged wristwatch. Prior to Timex’ launch, wristwatches came in only two “flavors”.  Most common were high-priced timepieces utilizing precious jewels in the mechanical movements and casing.  Watches of this type were sold exclusively through jewelry stores at prices in excess of $300. These luxury products defined the wristwatch category for many generations, and were often considered family heirlooms.
On the other end of the spectrum, watchmakers’ attempts to create lower priced alternatives with cheaper materials generally yielded poor quality, unreliable substitutes, largely shunned by consumers.
Timex developed a way to produce low-cost mechanical movements that used hard alloy metals in place of jewels. These new alloy bearings not only lowered the cost of goods, they made automated production easier, further lowering costs.  The net result was an extremely accurate and rugged wristwatch sold by drugstores and mass market outlets at prices as low as $6.95!
The problem facing Timex was how overcome consumers’ preconceived notion that cheap watches connoted shoddy quality.
How did they do it?  Once again by blowing up prevailing consumer views with a successful ad campaign under the banner “Takes A Lickin’ And Keeps On Tickin’ “.  In each of these ads, a Timex watch was exposed to a draconian torture test (some on live television!) to demonstrate the accuracy and ruggedness of the product.
Take a look at this vintage clip for example, where a Timex is strapped to the tip of an arrow and shot by a bowman through a pane of glass (the shattering glass motif, redux), into a wall before dropping into a fish tank filled with water: http://www.youtube.com/watch?v=7_fKppH8B0g

Needless to say, Timex watches always survived the lickin’ and kept on tickin’! By literally shattering the prevailing consumer image of cheap watches , Timex emerged as the market leader, selling one out of every three watches in the US by the end of the 1950′s.
—————————————————————————————————————
3. Sodastream Banned Superbowl Ad, 2013
Fast forward to Superbowl 47 this month. One of the game’s ad sponsors — Sodastream — made quite a splash literally and figuratively by having its ads banned by CBS.  What was considered a banish-able offense by the game’s broadcaster?  See for yourself:  http://www.youtube.com/watch?v=b9I-sMhh23g
Sodastream’s use of exploding glass — in this case bottles of Coke and Pepsi (themselves perennial heavy advertisers of the Superbowl) — underscores Sodastream’s marketing challenge. Generations of consumers have been brought up consuming soft drinks from bottles whose signature design are an American icon. To communicate the benefits of a radically different approach to soft drink home consumption, Sodastream used — you guessed it — the exploding glass motif to blow up consumers’ prior behavior and beliefs.

Within a week of the Superbowl, Sodastream’s banned ad had been seen by almost  5 million viewers on YouTube.  And the company’s sales have been recently growing  by ~50% per year, so obviously Sodastream’s message is getting through to the marketplace.
—————————————————————————————————————
4. IKEA Unböring Ads, 2003
In 2003, IKEA unveiled its “Unböring” campaign aimed at shattering consumers’  preconceived unflattering notions about home furnishings.  The prevailing consumer view was that furniture is boring and shopping is unpleasant — to be avoided at all costs.  One market study at the time suggested that Americans tended to change spouses more often than dining room tables!
IKEA’s “Unböring” ads jarringly attacked its dreary category image, in one case calling customers attached to their current unstylish furnishings as “stupid”, and in another, having a woman commenting on her bored-to-death furniture and life with the epithet: “That Sucks!”

This latter ad uses more of an implosion than explosion to make the point, but the intent is the same as the other cases noted above: to shatter consumers’ preconceived category norms.  Check out the IKEA’s  Unböring” ad here: http://www.youtube.com/watch?v=vf_u42R9IQ8&feature=related
—————————————————————————————————————
The Bottom Line
The lesson learned is that to shake consumers out of old habits and/or preconceived unflattering category norms, companies need to be as innovative in their marketing approach as they are in new product design.  No matter how compelling its advantages, if your new product requires consumers to radically rethink their behavior and marketplace beliefs , you will probably need to find ways to jar consumers out of their current mindsets.
You may want to look no further than the shattering glass motif to launch your next breakthrough product.

Strategic Inertia

Leave a reply

In theory, effective business strategy is straightforwardly simple.  The building blocks are strategic clarity and alignment:

  • develop products and services that deliver a compelling value proposition in terms that can be clearly articulated to consumers, employees and stakeholders (clarity); and
  • build capabilities which create a competitive advantage in your ability to deliver a superior value proposition (alignment).

So if it’s that simple, why is it that ~90% of new product launches fail to meet their business targets or that more than three-fourths of mergers and acquisitions fail to create shareholder value or that fewer than 15% of Fortune 500 enterprises are able to sustain above market growth over multiple decades??  In short, why do so many strategies fail to sustain long term profitable growth?

A sage piece of investment advice is relevant in answering this question for established businesses.

It has been suggested that when deciding whether to hold or sell a stock, it’s useful to ask oneself: “would I buy the stock now if I didn‘t own it?”  If the answer is yes, hold. If no, sell.

What guidance does this  advice provide to business managers about  strategy?  In a similar vein, managers should periodically ask themselves two questions:

  1. If I didn’t have my current products on the market, are these the “clean sheet” designs I’d want to be launching today? 
  2. If I were starting from scratch, is this the organization and skills I’d want in my company?

If the answer to either of these questions is no, your current strategy is not positioned to succeed and your primary focus must be on retooling your products, your organization or both.

But in fact, most companies trapped with outdated products and/or organizational capabilities fight to defend their losing hand, with predictably poor results. In short, too many executives are guilty of strategic inertia.

Take the book publishing industry for example. Long after the Amazon Kindle had launched, when it was inescapably obvious that ebooks were going to be a major force in the industry,  book publishing CEO’s should have been asking themselves what new skills they needed to cultivate in their organizations and what new, enhanced products they needed to succeed in the post-digital industry. 

Instead, too many publishing execs took out their frustration with the growth of ebooks — which they viewed as threatening their value proposition and price realization — on consumers!

How?  First by selectively delaying the release of popular frontlist books in digital form and then engaging in a nasty, allegedly collusive price fixing fight with Amazon to impose a significant increase in ebook consumer prices.

Early adopters of ebooks were amongst the most avid readers in the country — the very customers book publishers should most want to serve.  And yet, one Big Six publishing CEO, commenting on her company’s decision to start delaying the release of best sellers in ebook form (which had been standard industry practice at the time) noted: “with new electronic readers coming and sales booming, we need to do this now, before the installed base of ebook reading devices gets to a size where doing it would be impossible.”

Unless your company is committed to continuously update your capabilities to deliver what consumers value, your strategy will not succeed in the long term. The proof that this is easier said than done is that so few companies succeed in sustaining long term profitable growth.

What is Apple’s Product Strategy — Strategic Rigidity or Enlightened Expansion?

Leave a reply

Rumors are flying that Apple has a cheap iPhone in the works.  Coming on the heels of the iPad Mini, a growing chorus of groans is hitting the Twitterverse and blogosphere (to use two horrific terms) bemoaning that Apple is turning its back on Steve Jobs’ obsessive commitment to über product superiority; i.e. the best or nothing!

Perhaps.

But consider this:

  • The iPad mini is NOT a watered down iPad.  It’s a fundamentally different form factor that has different use patterns (e.g. a lot more e-reading) and different users than the full-size iPad. For purists who believe Steve Jobs would never have compromised the size of the original iPad (as if a 9.5” X 7.3” rounded-corner rectangle were handed down from the gods), keep in mind that the iPad Mini still sells at a considerable price premium to other similar sized Android tablets.  The Mini’s screen resolution may not be best in class (for now), but there’s no doubt that the smaller Mini benefits from Apple’s elegant design, pleasing user interface and extensive apps library.  It’s still an Apple product
  • Apple has created a powerful ecosystem of cloud-connected devices. It is in their interest to ensure that consumers can continue to affordably access multiple devices on iCloud.
  • Apple’s growth prospects are increasingly tied to Asian markets, where price sensitivity is greater than in the US.  For those with the appetite and wallet for Apple’s very best technology, the company is continuing to roll out new products at an accelerating pace.  For billions of other consumers who might think an iPhone “Lite” is still an astonishing product, it’s a good thing for the company and its consumers that they now have a choice.
  • This same angst dogged the product line expansion of German luxury carmakers as they began straying from their original über car roots.  In the 1970’s for example, Mercedes Benz ONLY made large, expensive sedans and a big-engine roadster. But as their global popularity grew, MB progressively expanded to midsize and (sacré bleu!) compact cars as well.  The purists were outraged that the company was abandoning its elitist roots.  But Mercedes wisely asked itself, “if a customer only has need for a more affordable small car but still wants a Mercedes, what would it look like”?  And so they produced smaller sedans and coupes with the same engineering refinements that makes a Mercedes, well a Mercedes.  Ditto with Porsche who started selling a four-door sedan (the Panamera — sacré bleu squared!) in 2009. Still a Porsche, through and through.
  • So the challenge for Apple is to ask itself, if a consumer wants an iPhone (perhaps a first phone for a teenage daughter) but not necessarily with all the bells and whistles (and price) of a top-of-line model, “what would a lighter duty version look like – and still be an Apple”?

Strategic rigidity to an unwavering elitist ideal would not serve Apple well going forward, nor would reckless abandonment of its core
values.  I’ve seen little evidence that Apple is moving in either of these undesirable directions.  But like all great companies, the brand is only as good as its newest products.  Roll on.

Strategic Alignment

Leave a reply

In my last blog post, I noted the importance of strategic clarity, in terms of the ability of your company to articulate who you are selling to; what is the value proposition and how you can achieve competitive advantage in delivering designated products and services.

Easier said than done!

But let’s stipulate that your company has crystallized its strategy in these
terms.  The next step is to ensure you can capture the inherent value in your strategy through strategic alignment. 

Simply stated, strategic alignment is the development of a company’s capabilities — it’s processes, operations, management systems and culture — to uniquely support its strategy and desired value proposition.

Here are a couple examples to break through the jargon.

What do Southwest Airlines and BMW have in common?  Very little actually, starting with distinctly different strategic priorities and value propositions. Southwest strives to deliver frequent, friendly reliable flights to price-sensitive leisure and business travelers at a cost others can’t profitably match.  BMW, on the other hand strives to deliver “ultimate driving machines” at a premium price that delivers value to a select segment of automotive enthusiasts.

Each of these value propositions can be highly successful, but only if these companies align their core competencies to consistently, efficiently and effectively execute their chosen strategy.  In Southwest’s case, this entails highly standardized and simplified flight operations (e.g. one plane type, one class of service, no meals), industry leading labor relations to foster a service-oriented culture and highly disciplined management to avoid over-extending route coverage in this highly cyclical industry.  The net result has been decades of extraordinary shareholder value growth, with no morale-killing layoffs in an industry where most legacy airline competitors have been in and (sometimes) out of bankruptcy.

BMW on the other hand needs very different core competencies to support its distinctive strategic mission — namely an organization that emphasizes R&D, state-of-the-art engineering and product development processes and a culture that encourages a commitment to best-in-class products.  These are expensive capabilities to develop and maintain, but the company is explicitly investing to deliver value to a class of customer that is able and willing to pay a premium for consistently superior products.

Companies that succeed in creating a tight linkage between their strategic intent and aligned capabilities are very difficult for competitors to copy.

Sure, it’s easy for an airline competitor to temporarily slash fares to match Southwest, but unless they have the same underlying operational focus, organizational culture and management discipline, their cost structures will not allow a permanent low-fare position.  Similarly, automotive competitors have run ads for years suggesting their products compare favorably with BMW (at a far lower price).  But the marketplace has generally continued to recognize and reward BMW’s product excellence, despite its premium prices.

In sound bite terms, it seems so simple: clearly articulate your strategy (who/what/how) and align all your capabilities to support superior execution.

In my next post, I’ll opine on why so many companies struggle to meet these two strategic imperatives.