categorystrategy

I paid my American Express bill late recently and incurred a $29 late fee. I called and innocently inquired about it hoping that it would be forgiven. The nice customer service rep that explained to me what day my payment had been due and what day mine actually arrived didn’t hesitate to help me out. She said that I had been a member for a long time and she would certainly remove the charge. Of course, I thought to myself. I’ve been a member since 1989.

I feel that I get better customer service from American Express. Do I actually? I don’t know, but it seems that way to me and that makes a difference. In fact I didn’t just say that that I had an American Express card, or that I used one. I called myself a member. Think about the power of that. How many other products elicit feelings of membership by their users?

Sharp sells LCD TVs and to me has a great advantage. Their company name is a positive characteristic of the product. What fantastic branding. So how does Sharp capitalize on that advantage? They don’t. Instead they paid some untold sum of money to branding experts to christen their LCD television line as “Aquos.” The name Aquos is fine by branding standards. It conjures up pleasant images water and fluid motion. But LCD televisions are about unparalleled clarity. Water and fluid are about blurred motion. Dump the Aquos branding Sharp and capitalize on your fortunate corporate name.

Tom Peters points to Consumer Reports picking automotive winners in ten out of ten categories all from Japanese manufacturers. Ironically this was the first thing I read when I got back into the office. I had just picked up my wife after she had to drop the minivan off for an unexpected $600 in repairs. Seems the heater wasn’t working so she took it in to find four other things that needed to be addressed including a transmission leak. Our Ford Windstar has 65k miles. She drove me back to work in my Toyota Camry which has performed reliably for 130,000 miles.

Of course my anecdote doesn’t mean much in the big picture but I think that the U.S. automakers don’t have an image problem as much as they have a perception problem. Namely many U.S. consumers perceive that there is a tangible reason to “buy American” and may be causing more harm than good. A customer market defined by dogmatic allegiance gives us today’s General Motors in the same way it gives us the Chicago Bears. Both perennial underperformers who can sell to the faithful with the fear of what might happen if they don’t buy. A season ticket holder in football country (Chicago, Green Bay, etc.) doesn’t want to give up a coveted spot after a string of losing seasons because he then won’t have it when they start winning. The Buy American crowd won’t buy a Toyota made in Kentucky by American workers because they fear the profit is going overseas and taking jobs with it. So they buy a Ford with a Mazda engine. Or a Cadillac made in Canada.

The essence of a car being American or not is really about jobs. American buyers want to use the power of the wallet in a way they feel is best for the U.S. economy in terms of supporting American jobs. To the extent those buyers view cars as a tangible object that’s bought fully-formed, that image problem is causing tremendous economic waste. Here’s why. Cars are of course a physical object but also are the end result of a long design and development process, a complex global supply chain, and a massive distribution network. At every step of every one of those processes there are jobs. We can easily picture the auto-worker on the assembly line and we may have a strong union orientation, but the bulk of the jobs created by the automotive industry are outside of the manufacturing plant. Americans are employed in car dealerships, advertising agencies, repair shops, and car washes. And those jobs are the same whether the car is a Ford or a Honda or a Pontiac or a BMW.

Truly efficient markets with frictionless substitution will deliver better products at better value. When personal bias or politics props up an inferior product or manufacturer it masks the competitive threat until it is too late for that manufacturer to adapt. It’s like the tectonic plates under an earthquake fault trying to slide but building up pressure. The result can be devastating. The industry suffered one massive quake in the 1970s – are American consumers building up the friction to cause another one?

Clayton Christensen has been inspirational to me. I read his books shortly after I posted my thoughts on the value chain concept and was thrilled to hear him do a better job of articulating similar ideas. Considering that I am a Mac user and a huge fan of the iPod I find his interview in Business Week discussing Apple’s future prospects very interesting. I am going to disagree with him on a few points, not because I am right and he is wrong, but because I find it interesting to examine Apple’s current success defying conventional wisdom.

Christensen bases his opinion that Apple will falter with its continued proprietary approach on the principle of industry standards. It is inevitable in his view that there is an inexorable push toward “the standardization of interfaces, which lets companies specialize on pieces of the overall system, and the product becomes modular. At that point, the competitive advantage of the early leader dissipates, and the ability to make money migrates to whoever controls the performance-defining subsystem.” The consumer electronics industry indeed follows this model of standardization and modularization driven in large part by the economics of competition and consumer desire for cheaper products. But the theory ignores an important characteristic, usability. Buyers across many disparate categories have shown a willingness to pay more for a better user experience. When the goal of providing that experience diverges from the focus on cost-cutting, an opportunity emerges for a company like Apple to provide a product that costs more and is perceived to be better. I consider the Mac and the iPod to exemplify this “better for more” category.

Any discussion about Apple inevitably leads to a comparison with Dell. And indeed Christensen goes on to state the Apple cannot innovate its way to greater market share for the Mac because “a good Dell PC can be had for $500, and it has performance that’s well beyond what most of us need.” I’d argue that Dell achieved impressive results driving cost out of the system from innovative process improvement, but now lower prices and increased performance no longer qualify as innovation. Look at what Guy Kawasaki recently said about innovating by jumping to the next curve. “Too many companies duke it out on the same curve. If they were daisy wheel printer companies, they think innovation means adding Helvetica in 24 points. Instead, they should invent laser printing. True innovation happens when a company jumps to the next curve–or better still, invents the next curve.” Could it be the case that now that computers are both powerful and cheap enough that they will be differentiated by usability?

Since we have such a love/hate relationship with computers, I’ll use the iPod to illustrate my idea. In the market for portable music players there are plenty of devices that cost less and/or have more capacity or features than the iPod. But any of them would be lucky to achieve 2% market share compared to iPod’s 75%. People are clearly paying for a better user experience. Even factoring in that some of that market share is due to marketing and trendiness. But I know people that have another player and switched to an iPod.

And what’s the user experience they are switching to? It’s that very lock-in that by all accounts should be driving them away from the iPod to the more open competitors. Look at it from the point of view of a less technical user. Where is my music? It’s in iTunes. Where is the music store? It’s in iTunes. How do I rip music from my CDs? In iTunes. Where does my iPod appear on my computer when I connect it? Again, in iTunes.

Any Apple competitor could offer this experience, but they don’t. And they won’t because they rely on the modular approach of hardware vendors supplying the hardware, software vendors supplying the software, and Microsoft providing the standards. This makes it all interoperable, but prevents building and offering a unified user experience. This is the market model Christensen predicts will succeed based on commoditization pressures at each layer in the value chain. A user can swap out one player for a cheaper or more feature-rich model and continue to use the same software and online music stores. Or switch software or stores. It’s all interoperable.

The way to add value and thrive in such a competitive market is to integrate value from another layer. (This is my view and not necessarily Christensen’s.) Thus when the iTunes software tightly integrates with the iTunes Music Store it sacrifices market interoperability but adds usability value. Same with the iPod and iTunes. We are witnessing a market where the customer is valuing the improvements in user experience over the economic value of openness and interoperability.

But the economic advantages are not absent in the iPod and the Mac. The component layers are still commoditizing. Hard drives, processors, displays, and other components are industry standard in the Apple product line. Apple thus benefits from the same component pricing economics as its hardware competitors. It is only the operating system layer that is proprietary and tied to the hardware. And again, from the user perspective that is the layer of interaction. You only buy the product one time, but you use it continuously. Is it hard to believe then that users would make a value judgement and choose to pay more for a better user experience?

None of this is to say that Apple can continue to stay ahead of the market with an approach that defies the conventional economic forces of the industry. But I think the economic argument is overlooking the impact usability has on value.

I’ve commented earlier on my disappointment with consumer goods retailers putting their private label products between the facings of like branded products. This may seem trivial, but I am talking about the broader issue of using the physical appearance of a section to direct consumer behavior. One of the strengths of effective shelving strategy is the development of subcategories. When my job was developing planograms I focused on moving the consumer up to higher priced premium items. I positioned them in such a way as to draw the consunmers’ eye while they reached for the popular standard items. I shelved items together in a block to build a premium subcategory.

Let’s take a look at what a new large-format Kroger is doing in the cereal section.

I find that less than asthetically pleasing, but even more importantly I find that it undermines the segment of adult complex cereal that Post is trying to create. We all know that the shelf belongs to Kroger and that they can put their private label cereal any where they want. We also know that they make a better profit margin on their own product. But, let’s look at the reasoning behind this little subcategory.

Ready to eat cereal (the kind you pour in a bowl and add milk) is a $7 billion market. It appeals, and is marketed, mostly to kids. Today adults are increasingly skipping breakfast or eating on the run. So cereal manufacturers are trying different methods to appeal to adults and increase consumption. They try adding benefits, in the form of vitamins, antioxidents, fiber, etc. They also try developing more complex flavors to appeal to grown up tastes. In the case of the Post Selects (formerly Post Morning Traditions) line, these are cereals with complex adult tastes and are shelved at the top of the section with the shredded wheat. They carry the sub-brand Selects and have similar packaging elements. Shelving them together in a block is a method of visually drawing the consumer to a subcategory. Shelved haphazardly they would get lost in the section. But to the extent that they can draw the consumer’s eye they can increase awareness and ideally create a cereal customer out of an adult that was only buying cereal for the children.

The typical retailer approach to shelving is to stick the private label item directly next to the item it is designed to take customers from. That’s fine from a profit-per-item approach, but short-sighted from a category strategy approach. Let’s take a look at what Super Target is doing in the same section.

You can see a different strategy here. Target has expanded the concept of the adult complex cereal into a comprehensive subcategory. Post Selects are still located on the top shelf where the consumer would expect to find them. But now there is an entire block of similar items shelved below. This is a private label subsection influenced by the successful strategy of Post cereals.

While Kroger is eyeing tenths of a percent of market share with dollar signs in their eyes, Target is actively building the category. I propose that retailers work together with manufacturers for the benefit of the entire category. Finding ways to bring more consumers to the section and giving them something to buy is the right strategy. Shifting market share from one product to another is not the path to growth.

Consumer goods are becoming more like consumer services. As I mentioned below in my discussion of the value chain, a product can acquire more value by integrating an additional consumer benefit. This benefit is often found at a different level of the value chain from where the actual product fits. The key to unlocking additional revenue potential for a consumer products company is to integrate that value into the product. To make the product more like a service.

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Data analysis is the new retail arms race. Smart retailers have moved beyond the concepts of location, market positioning, and product segmentation to now focus on the effective utilization of data. Retailers once knew their customer base personally, but grew beyond that into far-reaching corporations. Consumer goods manufacturers, seeking to get closer to consumers, embraced analytics and category management to take control of the retailers’ shelves. Here’s a look back at how those manufacturers and retailers began using transactional data and consumer research and where we are today.

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When I worked a retail territory at Kraft I felt like I owned the brands. I wasn’t just their representative; I was their champion, their protector. I defended their shelf space and launched offensives against the territory of competitive brands. But most importantly I had that emotional attachment to them. I liked them.

Previously I had had a retail analysis job in a sales office. There the products were just numbers on page after page of retail results. I always liked the physical boxes and would collect samples of new items to display around my desk. And I was always surprised that those who had the responsibility for the brands seemed to care less about them than I.

I first noticed this when I observed that the Beverage division manager kept referring to “RKA.” That’s Regular Kool-Aid, the small envelopes of Kool-Aid that you mix with water and sugar. To me that’s a valuable brand and an important product for the company. But to everyone responsible for it, it was just RKA. Like everything else it was measured in pounds sold.

If we enter a time when brands decline in prominence, I will place the blame on the employees who “own” those brands. Do you care about your company’s products? Do you like to use them? Or are they just SKUs with monthly sales goals? It’s hard to have a successful category strategy when you’ve abandoned your products’ most enduring characteristic – their brand identity.

I consumed Kraft brands because I was proud of my company. I tried new products from our competitors because I wanted to know what I was competing against. I thought like a consumer. I believe that employees should feel passionate about their company and its products and brands. And companies need to create a culture that enables that. More focus on the brand and the overall strategy and less on process, procedures, and short-term targets. No one is going to care much about RKA, but they might get behind the idea of “owning the summertime” with Kool-Aid. If that environment does exist then it falls to recruiters and hiring managers to bring on the right mix of people who have that passion. And to them I say, keep looking. We’re out here.

Here’s an idea…

My wife just spent an afternoon at Dream Dinners. It’s a service where one assembles meals, pre-selected from a menu, using supplied ingredients and instructions. Everything is included at each meal station including the storage bag to freeze it in and the heating instructions. She went with a friend and had fun, but also freed up a significant amount of future meal preparation time. The meals are each priced like an entrée at a nice restaurant, but they serve four to six people. Factoring all that in it seems like a pretty good deal to me. I’m just wondering why I had never heard of this before and why she had to drive to the other side of town to do it.

And I’ve got an idea….

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