Thursday, May 27, 2010

Coming Back from the Dead

RadioShack Corporation has re-imagined itself as a major seller of smart phones. In an effort to get past its old and dowdy image, it has rebranded itself as “The Shack.” Today, it devotes about half of its relatively small stores’ shelf space to smart phones. It offers phones for most of the major carriers, as well as the Apple iPhone. This re-imaging seems to be helping the company. Its sales and stock price are on the rise.

Competition is getting tougher, however. The leader in electronic superstores, Best Buy, offers smart phones both in its main stores and in its fast-growing small stores, Best Buy Mobile, which sell only phones and phone equipment. Wal-Mart Stores is also a leader in electronics retailing. Wal-Mart is expanding into the fast-growing mobile phone business as well.

Let’s use the Customer Buying Hierarchy to guess at how this market might develop. Without a lot of deep research into the industry, I would guess that Best Buy will emerge as the Function leader. (See “Video #13: Definition of Function” on It will offer more phones and more informed advice than will its competitors. The Shack is a Convenience player. They won’t have the Function choices of Best Buy but, with their 6500 locations, they will be a very Convenient buy for many consumers. (See “Video #15: Definition of Convenience” on Wal-Mart’s strength will be both Convenience and Price. It offers Convenience in the sense that it offers smart phones, along with many other items that customers will buy much more frequently than they buy a smart phone. Primarily, Wal-Mart will offer low prices. (See “Video #10: Industry Consolidation and Recycling of Capacity” on It is unlikely that anyone will compete seriously with them on pricing.

The smart phone market is a fast-growing market. Most of these markets see market shares shift due to Function and Price innovations. These are areas of real strength for Best Buy and Wal-Mart. Convenience will usually be a less important benefit in the movement of market share in these kinds of markets.

Monday, May 24, 2010

Convenience and Reliability Innovations in a Fast-Growing Market

In a rapidly growing market, one growing faster than 15% a year in units, Function innovations tend to dominate market share movement. That is, Function innovations move more market share, on average, than do innovations in Reliability and Convenience. Often, the second major driver of market share movement in a fast-growing market is Price. Low prices and low-end competition often expand the market and cause significant market share shifts at the same time.

That is not to say that there aren’t Reliability and Convenience innovations. There are. The electronic reader market offers illustrations of these innovations. Barnes & Noble has an electronic reader called the Nook. This electronic reader is lagging in the market today, especially against the Amazon Kindle and the Apple iPad. To build awareness for its Nook product, Barnes & Noble has returned to T.V. advertising for the first time in several years. It wants to distinguish itself in the babble of noise from the many emerging eReaders and Tablets.

Advertising is both a Convenience and a Reliability innovation. It’s a Convenience innovation in that it helps the customer think of the product and know where to look for it. (See “Audio Tip #92: How Do We Add Knowledge to the Customer?” on Advertising is also often a Reliability innovation because advertised products have stronger brand names and the aura of Reliability among consumers in a market. So advertising for Barnes & Noble should help the Nook gain some traction in the market. Will it be enough to overcome its laggard status? Probably not, due to its limited Function benefits in the form of attractive book titles. (See “Audio Tip #64: The Objectives of a Performance Improvement Program” on

The leader in the market, Amazon’s Kindle, is also innovating its product in the form of Convenience. In the past, Amazon sold the Kindle only through its web site. This policy was in keeping with Amazon’s effort to get consumers of all products to purchase online, rather than through bricks-and-mortar retailers. Amazon has thought the better of this policy, though, with the advent of the Apple iPad. In part as a response to the availability of the iPad in Apple’s stores, Amazon has allowed Target to begin offering the Kindle at Target stores. Offering the product at Target is primarily a Convenience innovation. A customer can pick up the product faster at a Target store than by ordering online. In some ways, it is also a Reliability innovation. The customers can hold the product in their hands and see how the product works. Primarily, though, this is a Convenience innovation. Its main benefit for Amazon will be to prevent some loss of customer market share to a more Convenient iPad product. (See “Audio Tip #93: How Do We Reduce the Resources Used With Our Product?” on

Tuesday, May 18, 2010

Hey, We Got New Features

We have written several times about the Customer Buying Hierarchy. See some examples HERE, HERE, and HERE. This Hierarchy holds that customers buy Function, Reliability, Convenience and Price, and in that order. Most people assume that new Functions or Features drive a great deal of market share change. In most industries, this is not the case. In a Hostile industry, it is not the case at all. I recently read of two industries who stress Function innovation today. One will succeed with this kind of innovation. The other will have, at best, fleeting success with it. Function innovations work best, and are sometimes critical to the success of a company, in high-growth and stable high-profit industries. (See the Perspective, “When to Compete on Features” on They are much less helpful in a very tough Hostile industry.

The TV broadcasting industry is stable and highly profitable. It has become somewhat more competitive over the last few years, as cheaper satellite broadcasters take share from the dominant cable TV firms. Innovation has kept prices high and stable. This industry caught a break a few years ago when high-definition television made its debut and caused sales of new televisions to soar. These soaring television sales pulled with them new high-definition channels and premium services offered by the television broadcasters. These were Function innovations. An industry leader had to offer them in order to stay competitive in the market.

Now the industry may have caught a break with another new technology, 3-D. Broadcasters, content providers and television manufacturers are all betting that 3-D will be the next big Function innovation in television. So far, DirectTV has taken the lead in offering 3-D content. This, again, is a Function innovation which should appeal to customers in a fast-growing market.

The hotel industry is Hostile today. The recession has taken the air out of the sales of hotel companies. In response to the fall-off in demand, the leading hotel companies are searching around for their next “new thing” to attract customers away from one another. Obviously, there is less demand to go around, so the only hope a company has to improve its revenues is to take customers from another competitor. Now the industry leading competitors are trying a Function innovation to take market share. This Function innovation is in bathrooms. Many hotels are investing in bathroom upgrades, including better hairdryers, new packaging of soaps and shampoos, larger and thicker towels and bathroom throw rugs, among other innovations.

These Function innovations in a Hostile marketplace will move very little market share. The reason is that virtually all competitors will copy the Function innovations as soon as it is clear that they appeal to customers. We have seen Function innovations fail before. Remember the more comfortable beds? How about the flat screen high-definition televisions? Or what about the new paint and decorations? Wifi in every room? All of these innovations had a very short period of uniqueness. Once hotel competitors saw they helped the top and bottom line, everyone copied them. Now they are all taken for granted.

Sometimes an industry turns Hostile when Function innovations can no longer produce lasting market share benefits. Then customers have to make their buying decision on Reliability, Convenience or Price. Reliability and Convenience are much more costly benefits on which to stake a company’s reputation with customers, so relatively few companies really invest to achieve superb Reliability and Convenience. That is why these benefits usually mark the industry winners in very tough markets. (See the Perspective, “Reliabiilty: The Hard Road to Sustainable Advantage” on

Thursday, May 13, 2010

A Tale of Colorblindness Lost

The farm equipment industry is well known for the colors on the equipment of its major suppliers. Deere’s equipment is green, Caterpillar’s is yellow, and New Holland sports a blue color. Normally, customers are very loyal to the “colors” in the industry. This year, however, some customers are losing their green colorblindness. This loss of customer loyalty is coming as a result of a difficult trade-off Deere had to make. This loss of colorblindness also illustrates the way market share moves in many markets.

As the economy collapsed, taking the farm equipment industry with it, Deere had to make some tough choices. Its forecast for the industry’s loss of damage called for it to shrink its inventories radically, and it has done that exceedingly well. Its inventories, as a percentage of the last twelve months of sales, are, by far, the lowest among the industry’s largest suppliers. This inventory reduction, in part, came as Deere borrowed a page from Dell’s success in the personal computer market. Deere is attempting to become a build-to-order company in order to keep working capital investments low and manufacturing economies high.

However, a bump in the road has arisen. The market for farm equipment came back stronger than Deere’s forecasts. As a result, customers who order today will not receive their farm equipment in time for their harvest seasons. In fact, equipment will not arrive for a few months after the harvest. So, some erstwhile “true green” loyal customers are migrating to competing suppliers. Caterpillar, New Holland and others are the beneficiaries of this market share movement.

This illustrates one of the two ways that market share moves in a market. (See “Audio Tip #29: Positive vs. Negative Volatility” on In one way, which we call a “win”, a supplier in the industry does something that most of the other industry competitors either will nor, or can not do, and wins market share at the expense of its competitors. (See “Audio Tip #34: How Does a Company “Win” in a Market?”) In the second mode of market share movement, which we call a “failure”, a supplier who is an incumbent in a customer relationship either can not, or will not, do something that at least half the other competitors in the market can, and will, do. (See “Audio Tip 35: How Does a Company “Fail” in a Market?”)

In most markets, failures move more market share than do wins. Competitor offerings are close enough to one another that most customers will not change suppliers readily. It is difficult to “win.” On the other hand, it is much easier to “fail” in a customer relationship. You can fail to offer a new Function; allow your Reliability reputation to erode; you can stretch out the order cycle time on the customer and fail in Convenience; or you can hold prices high and fail in Price.

Deere has a two-fold “failure” in this marketplace. It is failing its end users because it stretched out its order cycle time. Deere failed on Convenience for the end users. A more important failure, though, has occurred with its channels of distribution. Deere is failing its channels in Reliability. It does not have product when they have a market. Of the two failures, the Reliability failure is the more important. Over the years, we have seen many markets where customers will take on a secondary role supplier in order to ensure that they never are short of product when they need it. (See “Audio Tip #12: Supplier Roles and the Customer Buying Hierarchy” on

Deere succeeded in beating its major competitors in managing the profit decline over the last year. Their better profit management was the result of its aggressive cost management. On the other hand, its cost management is now causing it to lose market share due to failures of Convenience and Reliability. In the long run, Deere’s profit calculus is likely to work against them.

Monday, May 10, 2010

Who Are Those Guys?

Whenever an industry finds itself in the enviable position of having freedom in pricing, it usually finds that competition emerges out of the woodwork, from the least expected places. In many cases, the companies in these industries don’t conceive of new competition really having much of a chance to emerge. If they do see competition, they usually dismiss that competition as incapable of offering real competition.

Microsoft dominates the PC software market. It is likely to do so for many years to come. But Linux and Google have emerged to be a thorn in Microsoft’s side. Both of these alternatives have small market shares. However, both are able to limit Microsoft’s pricing power in some of its markets, especially governmental markets. (See the Symptom & Implication, “The industry leaders are losing share” on

Healthcare pricing seems to be out of anyone’s control today. Maybe ObamaCare will fix that, though that is hard to see when, overnight, we increased demand without increasing any supply. It is more likely that healthcare will continue; indeed, even accelerate. But there is an emergent competitor: medical tourism. Ten years ago, few of us would have considered going to a foreign country to undergo an important medical procedure. As recently as 2007, more than 750,000 Americans traveled abroad for a medical procedure. That market is growing at better than 15% a year. And as medical tourism grows, so too will the skills and capabilities resident at the medical facilities these tourists visit. They will become stronger competitors. (See the Symptom & Implication, “Competition is expanding with the appearance of discounters” on

Higher education is another area where school participants seem to have virtually unlimited pricing power. Along with that power has come a boom in for-profit college and university alternatives. These for-profit institutions are still a small factor in the market, but they are growing very rapidly. Now DeVry University and the University of Phoenix are unlikely to challenge the Ivy League any time soon. But, eventually, they will put the breaks on the pricing freedom in many of the lesser known public and private institutions.

Thursday, May 6, 2010

Pricing Flexibility

Monsanto is the dominant leader in the seed business. It has led in the development of genetically modified seeds for corn, soy beans and cotton. This spring, the company introduced new second generation versions of its herbicide tolerant soy bean line and its herbicide and pest resistant corn seed. The company expected to sell enough of the soy bean line to plant 8 to 10 million acres and enough of the corn line to plant 4 million acres. Instead, the farmers bought 6 million acres worth of the soy bean line and 3 million acres worth of the corn line. The overall demand for seeds was down somewhat due to the depressed economy, but DuPont’s Pioneer Hi-Bred seed line also gained share against Monsanto.

The problem Monsanto encountered went beyond the economy. It simply priced the new lines too high for the market. The new soy bean line cost 42% more than its predecessor. The new corn line 17% more than its predecessor. The company simply did not leave enough incentive for enough farmers to make the switch to hit the company’s volume targets. (See “Audio Tip #68: Producing a Net Value Improvement for Customers” on

The company responded quickly. After watching the market make a shambles of its volume forecasts, it announced that it would reduce its pricing by enough to increase its market share again.

This speedy response by a company in the marketplace stands in stark contrast to our governmental response to high pricing. If governments set a price too high, both consumers and the suppliers suffer. Current examples are the government interventions in the market to fix minimum wages and to increase taxes on employment.

In simple terms, the government sets a minimum wage price that is generally above the price that some employers are willing to pay. This new price, whether a minimum wage or an additional tax on employment, depresses demand for employees at the same time as it raises the potential supply. In a market where there is already more supply than demand, this is a prescription for a great deal of pain for both employees and employers. Some employers will shift jobs to less expensive areas of the world or simply not do them. Some employees will simply not find work. In particular, the employees least likely to find work are those with the lowest levels of skills, primarily the young and uneducated.

Throughout the post-war period, Europe created a cradle-to-grave system of social protections. They financed these social protections with high tax rates, charges on employment, and restrictions on the ability of an employer to reduce its workforce. At the end of 2009, Europe faced high employment rates for its young people. Belgium, France, Italy, the U.K., Sweden and Finland had rates of unemployment for people under 25 around 20% to 30%. The U.S. is now approaching the same level. Its unemployment rate for workers under 25 is about 20%, while overall unemployment rate is around 10%. The unemployment rate among black teenage males is 50%.

Not all of this high unemployment will go away with the reduction in the cost of employment. Some of our unemployed youth simply must have training they do not have today. But we show no signs today of recognizing what our high cost employment system has done to the demand for our youngest potential employees. It is too bad that our politicians don’t measure success in market share terms. Monsanto does and reverses course. Our response, if it ever comes, will be very late. (See "Video #41: Pricing Considerations in Hostile Markets” on

Monday, May 3, 2010

Investment Turf Wars

Over the last year, U.S. investors have pulled over $20 billion out of domestic stock funds and replaced these investments, in large part, with bond funds. Not every type of stock fund suffered, however. The February 2010 data illustrate this. Domestic stock funds, during that month, suffered $3.7 billion in withdrawals. On the other hand, international stock funds gained $4.6 billion. But the big winners were domestic Exchange Traded Equity Funds. They gained $4.8 billion. These ETFs are attracting investors with their very low costs in management fees and superior tax efficiency over the average mutual fund. Their growth is also an indication that investors have become more price-sensitive than they have been in the past. (See the Symptom & Implication, “Customers are more price sensitive” on

There is another interesting example of this emerging price-sensitivity in the potential for something of a price war among similar ETFs. In particular, there are two ETFs which seem to be squaring off against one another. One fund, iShare’s MSCI Emerging Markets Index Fund (EEM) is the dominant leader among ETFs that attract emerging markets. A growing follower is Vanguard’s Emerging Markets ETF (VWO).

The approach and results from both funds are similar. Each fund tracks the same index, the MSCI Emerging Markets Index, though they follow somewhat different approaches in tracking that index. Over the last five years, both funds have had similar returns on investment after consideration of price appreciation and dividends.

Despite their similarities, the two funds today show radically different appeals to investors. Over the last three months, EEM has experienced $4.4 billion in net outflows. In contrast, VWO has had $8 billion in net inflows over the same period of time. This $12 billion difference flies in the face of the fact that EEM today has over $39 billion under management, while VWO has $21 billion.

The apparent explanation? Pricing. The prices of these two similar ETFs are different. EEM charges 72 basis points (a basis point is 1% of 1%, so 50 basis points is equivalent to half a percent, or .50%). VWO, on the other hand, charges only 27 basis points.

The competitive landscape may be changing for these two very large ETFs. For most of the last five years, they did not bump into one another with great frequency. EEM concentrated on the institutional market, while VWO sought the hearts of retail investors. That may be changing. As markets grow fast, sooner or later companies in similar niches begin running into one another. (See the Symptom & Implication, “Competitors in formerly underdeveloped markets have begun meeting one another” on Witness Lowes and Home Depot, Staples and Office Max and Office Depot. When that happens, pricing begins to play a more important role in the battle equation between the two competitors.

Over the last few years, investors have developed a clear preference for inexpensive ETF funds rather than actively managed mutual funds. Now that low-price preference also seems to be showing up in competition among ETFs. Investors will surely be the winners here.