A short while ago, we wrote a blog about Radio Shack’s rebranding itself (See Blog HERE) as primarily a mobile product carrier. At the time, we predicted that Radio Shack would have a difficult time competing on Function with Best Buy. Though, it would be more Convenient than the average Best Buy. (See “Video #26: Example of the Customer Buying Hierarchy at Work” on StrategyStreet.com.)
Best Buy is ramping up its mobile product investment now. The company has created 80 stand-alone mobile stores from a standing start in 2006. It may add as many as 100 new shops this year. In addition to these stand-alone shops, BestBuy Mobile operates as a separate store within all 1,000 of Best Buy full-sized stores.
The company has set itself up to be able to catch the mobile wave without committing itself to high costs over the long term. The BestBuy Mobile stand-alone stores average 1500 square feet of footprint. The stores within the regular Best Buy stores are only 600 square feet. These stores compare with an average of 40,000 square feet for a regular Best Buy store. (See “Audio Tip #188: The Efficiency of the Input” on StrategyStreet.com.) The small footprint allows the company to offer fast-growing products in Convenient mall locations near consumers, especially women consumers. In a few years, when growth slows, the company can withdraw from these small locations at relatively little cost and fold the mobile business back into its large regular stores.
BestBuy Mobile looks to be the Function leader in this market. It offers ninety different handsets and service plans from nine carriers. They offer products that work on the networks run by all four major wireless carriers: AT&T, Verizon Wireless, Sprint Nextel and T-Mobile USA.
BestBuy Mobile offers clear advantages over the stores run by the wireless carriers. Their prices are lower. Pricing is also clear and easy, with no mail-in rebates. And the company promises that the customer will leave the store knowing exactly how to use their phone in what the company brands as its “Walk Out Working” product promise. This promise is both a Reliability and Convenience benefit.
Everyone else in the industry must be hearing Best Buy’s big footsteps.
Thursday, July 8, 2010
Tuesday, July 6, 2010
How to Fail in a Market You Dominate
The cable T.V. companies are the big dogs in the television industry. So far, no one has been able to unseat them, though they seem to be trying to unseat themselves. The cable industry is losing customers to satellite T.V. and phone companies entering the video market. The rate of these customer losses is significant.
In 2006, the cable T.V. companies controlled nearly 69 million video customers. By 2009, that number had fallen to 63 million. (See the Symptom & Implication, “The industry leaders are losing share” on StrategyStreet.com.) The problem is both price and service. Many consumers see these cable T.V. companies failing on both Price and Reliability. (See “Video #14: Definition of Reliability” on StrategyStreet.com.)
The cable T.V. companies have responded to the incursions of satellite and phone companies with discounts. Most of these discounts come in the form of bundles of products, including two or three choices among T.V., internet and telephone. Some of the discounts came in the form of free services during a promotional period. Still, the prices for cable T.V. have gone up every year faster than inflation. The discounts slowed, but did not stop, customer defections. Customers felt gouged.
A more troubling failure has come with customer service. We have all heard that power corrupts. Well, the cable T.V. companies had great market power for a long period of time. That power didn’t corrupt them in the moral sense, but certainly caused them to ignore the common tenets of good customer service. They offered service on their terms. Customers could take it or lump it. And customers became resentful.
Of the two failures, one of high prices and the other of Reliability failures with poor customer service, the most troubling is the Reliability failure. People tend not to forget and forgive Reliability failures for a long period of time. General Motors will be living down its reputation for less than stellar automobile quality for a long time. The same fate awaits the cable T.V. companies. (See “Audio Tip #35: How Does a Company "Fail" in a Market?” on StrategyStreet.com.)
In 2006, the cable T.V. companies controlled nearly 69 million video customers. By 2009, that number had fallen to 63 million. (See the Symptom & Implication, “The industry leaders are losing share” on StrategyStreet.com.) The problem is both price and service. Many consumers see these cable T.V. companies failing on both Price and Reliability. (See “Video #14: Definition of Reliability” on StrategyStreet.com.)
The cable T.V. companies have responded to the incursions of satellite and phone companies with discounts. Most of these discounts come in the form of bundles of products, including two or three choices among T.V., internet and telephone. Some of the discounts came in the form of free services during a promotional period. Still, the prices for cable T.V. have gone up every year faster than inflation. The discounts slowed, but did not stop, customer defections. Customers felt gouged.
A more troubling failure has come with customer service. We have all heard that power corrupts. Well, the cable T.V. companies had great market power for a long period of time. That power didn’t corrupt them in the moral sense, but certainly caused them to ignore the common tenets of good customer service. They offered service on their terms. Customers could take it or lump it. And customers became resentful.
Of the two failures, one of high prices and the other of Reliability failures with poor customer service, the most troubling is the Reliability failure. People tend not to forget and forgive Reliability failures for a long period of time. General Motors will be living down its reputation for less than stellar automobile quality for a long time. The same fate awaits the cable T.V. companies. (See “Audio Tip #35: How Does a Company "Fail" in a Market?” on StrategyStreet.com.)
Thursday, June 17, 2010
More Steel Capacity. Why?
China’s Anshan Iron and Steel Group has announced plans to invest in up to five new steel mills along with a U.S. domestic partner. The last time I looked, the U.S. was swimming in excess steel capacity. So why would this company enter the U.S. to add to an already over-supplied market? This is a political decision, not an economic one. Though, politics will obviously translate into dollars and cents eventually.
Anshan is partnering with Steel Development Company, a U.S. corporation, to invest $175 million in an initial “micro-mill” in Mississippi. Despite its cost, this is really a small investment. (See “Audio Tip #196: Why Economies of Scale Exist” on StrategyStreet.com.) The capacity of the mill is 300,000 metric tons. This mill will make reinforced metal bar. It adds relatively little to total capacity. The U.S. rebar market has 8 to 10 million short tons of capacity in the U.S. Nor does the new capacity add much to Anshan’s total capacity. Its total capacity in China totals 25 million metric tons.
This is a political investment. The U.S. government is under pressure from U.S. steelworkers. They charge that China competes unfairly in the steel industry. This investment is a partial response to that political problem.
We’ve seen this before. In the 1970s, I worked on a study to determine where a major Japanese electronics manufacturer should establish its first U.S. manufacturing facility. That new U.S. facility was not going to be a lower cost facility than those the company already had in Japan. But it would short-circuit arguments that the Japanese company was dumping its electronic products on the U.S. market. The Japanese automobile manufacturers, notably Honda and Toyota, did the same thing at roughly the same time. Over time, the Japanese auto plants were able to supply the domestic market economically. The domestic plants of the Japanese automakers, of course, have been operating under the cost umbrella held up by the United Autoworkers’ union wage rates and work rules. The U.S. steel industry has a lower union cost umbrella, so we are unlikely to see big foreign investments bringing a lot of new capacity to the U.S. steel industry. That is, we won’t see much more than is needed for political expediency. (See the Perspective, “Must the Cycle Start Again?” on StrategyStreet.com.)
Anshan is partnering with Steel Development Company, a U.S. corporation, to invest $175 million in an initial “micro-mill” in Mississippi. Despite its cost, this is really a small investment. (See “Audio Tip #196: Why Economies of Scale Exist” on StrategyStreet.com.) The capacity of the mill is 300,000 metric tons. This mill will make reinforced metal bar. It adds relatively little to total capacity. The U.S. rebar market has 8 to 10 million short tons of capacity in the U.S. Nor does the new capacity add much to Anshan’s total capacity. Its total capacity in China totals 25 million metric tons.
This is a political investment. The U.S. government is under pressure from U.S. steelworkers. They charge that China competes unfairly in the steel industry. This investment is a partial response to that political problem.
We’ve seen this before. In the 1970s, I worked on a study to determine where a major Japanese electronics manufacturer should establish its first U.S. manufacturing facility. That new U.S. facility was not going to be a lower cost facility than those the company already had in Japan. But it would short-circuit arguments that the Japanese company was dumping its electronic products on the U.S. market. The Japanese automobile manufacturers, notably Honda and Toyota, did the same thing at roughly the same time. Over time, the Japanese auto plants were able to supply the domestic market economically. The domestic plants of the Japanese automakers, of course, have been operating under the cost umbrella held up by the United Autoworkers’ union wage rates and work rules. The U.S. steel industry has a lower union cost umbrella, so we are unlikely to see big foreign investments bringing a lot of new capacity to the U.S. steel industry. That is, we won’t see much more than is needed for political expediency. (See the Perspective, “Must the Cycle Start Again?” on StrategyStreet.com.)
Monday, June 14, 2010
No Red Letter Day for BlueStar
Illinois opened its electricity market for non-residential customers in 1999. In 2010, about 75% of the electric load for commercial and industrial customers is purchased through alternative suppliers. That deregulation was a big success.
The state then deregulated its residential market in 2002. Virtually no one paid attention. Now there is a competitor about to enter the residential market where few have dared venture in the last eight years. But this entry is virtually certain to fail. BlueStar Energy is an alternative electricity supplier based in Chicago. This company is offering twelve month contracts that would lock in prices for consumers and save them an average of $6 to $7 per month over what those consumers would have paid to Commonwealth Edison.
We have to translate these $6 to $7 a month savings into percentages in order to have any perspective on the company’s prospects for success. These savings amount to an 8% to 9% savings for the consumer. This is not nearly enough to attract many new consumers.
We maintain a database of several hundred price reductions done over the last twenty-five years. These price reductions will vary according to the discounters’ objectives, target segments and with the components of price conveying for the discount. There is a strong warning for BlueStar in this price data. Their discount is not enough. Across our entire database of price reductions, the median discount is 25%, 75% of all discounts are 10% or more. That makes BlueStar’s 8% to 9% offering pretty sickly. (See StrategyStreet/Improve/Pricing/Reduce Price)
But the story gets worse if you are a low-end Price Leader as BlueStar is. BlueStar offers no advantage to the consumer other than price. That makes them a Price Leader. Price Leaders have to offer higher-than-average discounts in order to win significant market share. Low-end competitors have median discounts of 33%, 75% of them offer discounts of 20% or more to their customers.
Apparently, there are four other companies that Illinois has certified to supply residential electricity. They are waiting to see whether BlueStar is successful before entering. They won’t be coming. And BlueStar won’t be staying.
The state then deregulated its residential market in 2002. Virtually no one paid attention. Now there is a competitor about to enter the residential market where few have dared venture in the last eight years. But this entry is virtually certain to fail. BlueStar Energy is an alternative electricity supplier based in Chicago. This company is offering twelve month contracts that would lock in prices for consumers and save them an average of $6 to $7 per month over what those consumers would have paid to Commonwealth Edison.
We have to translate these $6 to $7 a month savings into percentages in order to have any perspective on the company’s prospects for success. These savings amount to an 8% to 9% savings for the consumer. This is not nearly enough to attract many new consumers.
We maintain a database of several hundred price reductions done over the last twenty-five years. These price reductions will vary according to the discounters’ objectives, target segments and with the components of price conveying for the discount. There is a strong warning for BlueStar in this price data. Their discount is not enough. Across our entire database of price reductions, the median discount is 25%, 75% of all discounts are 10% or more. That makes BlueStar’s 8% to 9% offering pretty sickly. (See StrategyStreet/Improve/Pricing/Reduce Price)
But the story gets worse if you are a low-end Price Leader as BlueStar is. BlueStar offers no advantage to the consumer other than price. That makes them a Price Leader. Price Leaders have to offer higher-than-average discounts in order to win significant market share. Low-end competitors have median discounts of 33%, 75% of them offer discounts of 20% or more to their customers.
Apparently, there are four other companies that Illinois has certified to supply residential electricity. They are waiting to see whether BlueStar is successful before entering. They won’t be coming. And BlueStar won’t be staying.
Thursday, June 10, 2010
How to Become the Industry Leader
Charles Schwab is the clear leader in the online brokerage world. While there have been hiccups in its development from a simple discount broker to a full-fledged online brokerage firm offering a range of products, the company has always maintained its leadership in the retail brokerage business. It focuses on the individual investor and, importantly, on investment advisors who manage retail customer accounts.
As the long time leader in the online brokerage industry, Schwab has emphasized the Customer Buying Hierarchy elements of Reliability and Convenience. Its advertising emphasizes Reliability, especially a personal caring relationship with its customers, for example, with its “talk to Chuck” advertising. The eponymous chairman and his company have consistently emphasized a relationship of trust between Schwab and the investor. (See the Perspective, “Reliability: The Hard Road to Sustainable Advantage” on StrategyStreet.com.)
Over the last few years, Schwab has entered many different product categories. As part of that effort, the company has recently introduced eight branded exchange-traded funds with very low cost management fees and commission-free trading. A couple of years ago, the company brought out a Visa credit card with no annual fee and a 2% cash-back feature. Its effort in entering these product categories has been to become a one-stop-shop for its customers. These are Convenience innovations. The customer has no need to leave Schwab to buy other products.
Schwab has been insightful in the way it manages its products and customer relationships. Two recent statements by Walter Bettinger, the current CEO of Charles Schwab, demonstrate the company’s commitment to Reliability and Convenience. In the first, the CEO acknowledges that the company may have to offer some products that have poor profitability in order to maintain a long term customer relationship. His observation: “We’ve never looked at product by product profitability as the answer to building a business.” A Standard Leader often has to measure profitability at the customer, rather than the product, level. (See the Perspective, “What We Do Know Can Hurt Us” on StrategyStreet.com.) The second statement is equally compelling and counter-intuitive in many companies. He observes: “Most companies are taken down, not by their competitors’ moves, but by their own.” In other words, industry leadership changes because the former leader fails, not because the new leader wins.
As the long time leader in the online brokerage industry, Schwab has emphasized the Customer Buying Hierarchy elements of Reliability and Convenience. Its advertising emphasizes Reliability, especially a personal caring relationship with its customers, for example, with its “talk to Chuck” advertising. The eponymous chairman and his company have consistently emphasized a relationship of trust between Schwab and the investor. (See the Perspective, “Reliability: The Hard Road to Sustainable Advantage” on StrategyStreet.com.)
Over the last few years, Schwab has entered many different product categories. As part of that effort, the company has recently introduced eight branded exchange-traded funds with very low cost management fees and commission-free trading. A couple of years ago, the company brought out a Visa credit card with no annual fee and a 2% cash-back feature. Its effort in entering these product categories has been to become a one-stop-shop for its customers. These are Convenience innovations. The customer has no need to leave Schwab to buy other products.
Schwab has been insightful in the way it manages its products and customer relationships. Two recent statements by Walter Bettinger, the current CEO of Charles Schwab, demonstrate the company’s commitment to Reliability and Convenience. In the first, the CEO acknowledges that the company may have to offer some products that have poor profitability in order to maintain a long term customer relationship. His observation: “We’ve never looked at product by product profitability as the answer to building a business.” A Standard Leader often has to measure profitability at the customer, rather than the product, level. (See the Perspective, “What We Do Know Can Hurt Us” on StrategyStreet.com.) The second statement is equally compelling and counter-intuitive in many companies. He observes: “Most companies are taken down, not by their competitors’ moves, but by their own.” In other words, industry leadership changes because the former leader fails, not because the new leader wins.
Tuesday, June 8, 2010
Can a High End Guy Hit the Mass Market?
Starbucks is a high-end competitor in the fast food industry. We call these high-end competitors Performance Leaders (see “Audio Tip #82: Performance Leader Products and Companies” on StrategyStreet.com). As individuals, these Performance Leaders almost always have small market shares. Starbucks has 4% of the U.S. market for brewed coffee. As a group, Performance Leader market shares usually fall below 15% of a total market. Sometimes these Performance Leaders, following the allure of the volume in the mass market, create products to enter the mass market. We call the competitors who serve the mass market as their primary function Standard Leaders. Standard Leaders control the majority of most markets.
Starbucks has decided to enter the Standard Leader product category with its Seattle’s Best coffee. This coffee brand, and its coffee beans, sell today in Border’s Book Stores and many supermarkets. Starbucks wants to sell the product in fast food outlets, coffee houses and even in vending machines. By expanding the Seattle’s Best Coffee franchise, Starbucks hopes to land a blow to slow the invasion of McDonalds and Dunkin’ Donuts into the specialty coffee market. These latter firms are Standard Leaders who offer espresso-based coffee drinks at lower prices than Starbucks.
It is very common for a Standard Leader to enter the high-end Performance Leader product category with its own brand, as McDonalds and Dunkin’ Donuts has done. (See “Audio Tip #60: Customer Segmentation by Needs” on StrategyStreet.com.) The list of Standard Leaders who enter the Performance Leader product category is almost as long as the list of Standard Leaders. Think of Toyota and Lexus, Dell and Alienware Computers, Marriott and the Ritz Hotel chain, Gap and Banana Republic, among others. Many Standard Leaders discover, as their industries mature, that they must offer Performance Leader products, and sometimes low-end, Price Leader, products in order to offer a full line of products for their end users or channels of distribution.
It is much less common for a Performance Leader company to enter the Standard Leader product category, as Starbucks plans. This is a much tougher initiative. The Standard Leader category sells to much different consumers with different value propositions and significantly higher demands for economies of scale. Apple tried this Standard Leader entry several years ago and backed off in the face of withering competition from Windows-based computer makers. Some Performance Leaders have succeeded, at least to some extent. Harley-Davison offers the Buell motorcycle. Pella offers windows through large hardware and lumber stores. American Express has succeeded in offering a credit card. Years ago, Marriott, while still a Performance Leader, entered the Standard Leader price point with Courtyard and the Price Leader price point with Fairfield Inn.
It can be done, but it is a daunting task. Most Performance Leaders stay strictly Performance Leaders. For example, one company with some similarity to Starbucks is Samuel Adams. That company has yet to offer a Samuel Adams Standard Leader product.
Starbucks has decided to enter the Standard Leader product category with its Seattle’s Best coffee. This coffee brand, and its coffee beans, sell today in Border’s Book Stores and many supermarkets. Starbucks wants to sell the product in fast food outlets, coffee houses and even in vending machines. By expanding the Seattle’s Best Coffee franchise, Starbucks hopes to land a blow to slow the invasion of McDonalds and Dunkin’ Donuts into the specialty coffee market. These latter firms are Standard Leaders who offer espresso-based coffee drinks at lower prices than Starbucks.
It is very common for a Standard Leader to enter the high-end Performance Leader product category with its own brand, as McDonalds and Dunkin’ Donuts has done. (See “Audio Tip #60: Customer Segmentation by Needs” on StrategyStreet.com.) The list of Standard Leaders who enter the Performance Leader product category is almost as long as the list of Standard Leaders. Think of Toyota and Lexus, Dell and Alienware Computers, Marriott and the Ritz Hotel chain, Gap and Banana Republic, among others. Many Standard Leaders discover, as their industries mature, that they must offer Performance Leader products, and sometimes low-end, Price Leader, products in order to offer a full line of products for their end users or channels of distribution.
It is much less common for a Performance Leader company to enter the Standard Leader product category, as Starbucks plans. This is a much tougher initiative. The Standard Leader category sells to much different consumers with different value propositions and significantly higher demands for economies of scale. Apple tried this Standard Leader entry several years ago and backed off in the face of withering competition from Windows-based computer makers. Some Performance Leaders have succeeded, at least to some extent. Harley-Davison offers the Buell motorcycle. Pella offers windows through large hardware and lumber stores. American Express has succeeded in offering a credit card. Years ago, Marriott, while still a Performance Leader, entered the Standard Leader price point with Courtyard and the Price Leader price point with Fairfield Inn.
It can be done, but it is a daunting task. Most Performance Leaders stay strictly Performance Leaders. For example, one company with some similarity to Starbucks is Samuel Adams. That company has yet to offer a Samuel Adams Standard Leader product.
Thursday, June 3, 2010
What's Missing in Internet Retailing
Every year I buy several things online. I don’t like to shop in stores because I usually need to buy only one thing. I hate to take the time to go to a store to buy just one item.
Online shopping, for me, beats bricks and mortar shopping on almost every dimension of the Customer Buying Hierarchy. (See “Video #17: Value and the Customer Buying Hierarchy” on StrategyStreet.com.) It has the advantage of Function. I can buy almost anything I want online. It has some advantages, though not all, over bricks and mortar in Reliability. When I shop online, I usually can find several web sites that will give me product reviews on exactly what I am trying to buy. Online shopping is more Convenient. I can sit at my desk to purchase, rather than going to a store and jostling with other equally impatient consumers. Online shopping is also more Convenient for me because I can easily check prices at a number of online outlets without having to visit them physically. So, online shopping also offers a Price advantage. I can usually get a lowest price guarantee when I shop online. That doesn’t necessarily mean that I will buy from the online site offering the lowest price, but I could if I wanted to do so.
I am sure I am not the only consumer who finds online shopping so advantageous. Web sales account for about 6.5% of total retail sales. That is a relatively small share, though it is growing. In 2009, total online sales increased by about 2%, while retail sales in bricks and mortar stores declined. So, online sales are growing market share in the retail sales industry. Why, though, doesn’t it have a higher share of total retail sales? Industry statistics lead me to think that the problem lies in a form of Reliability. (See the Perspective, “Customer Segmentation: Finding the Human Dimension” on StrategyStreet.com.)
The way people purchase today suggests that Reliability still remains a problem for online retailers. The top 500 web sites offering retail products grew 9% last year, considerably faster than total online sales at a 2% growth rate. However, the top 100 retail online sites grew 12%. Consumers clearly preferred the bigger online retail companies last year. Even more impressive, those companies that offer only online sales in the top 500 internet sales sites grew at 20% last year. Consumers are showing a strong preference for those online retailers who live and die with their online performance.
The online-only retailers tell the story of Amazon and the several thousand dwarves. Amazon has a 52% market share of the web-only online sales. The sales statistics and Amazon’s market power suggest that a form of Reliability is holding back the growth of internet retail sales. Consumers would like to know that they will receive the product that they ordered, that the product will work, that, if the product does not work, the retailer will stand behind it and that the retailer will guard the consumer’s credit card information carefully. Amazon has hurdled these barriers well and has reaped the rewards in growth and market share. All the other retailers selling online, especially those outside of the top 100, need to concentrate on creating assurances for their consumers that they can do as well as Amazon in these forms of Reliability.
Online shopping, for me, beats bricks and mortar shopping on almost every dimension of the Customer Buying Hierarchy. (See “Video #17: Value and the Customer Buying Hierarchy” on StrategyStreet.com.) It has the advantage of Function. I can buy almost anything I want online. It has some advantages, though not all, over bricks and mortar in Reliability. When I shop online, I usually can find several web sites that will give me product reviews on exactly what I am trying to buy. Online shopping is more Convenient. I can sit at my desk to purchase, rather than going to a store and jostling with other equally impatient consumers. Online shopping is also more Convenient for me because I can easily check prices at a number of online outlets without having to visit them physically. So, online shopping also offers a Price advantage. I can usually get a lowest price guarantee when I shop online. That doesn’t necessarily mean that I will buy from the online site offering the lowest price, but I could if I wanted to do so.
I am sure I am not the only consumer who finds online shopping so advantageous. Web sales account for about 6.5% of total retail sales. That is a relatively small share, though it is growing. In 2009, total online sales increased by about 2%, while retail sales in bricks and mortar stores declined. So, online sales are growing market share in the retail sales industry. Why, though, doesn’t it have a higher share of total retail sales? Industry statistics lead me to think that the problem lies in a form of Reliability. (See the Perspective, “Customer Segmentation: Finding the Human Dimension” on StrategyStreet.com.)
The way people purchase today suggests that Reliability still remains a problem for online retailers. The top 500 web sites offering retail products grew 9% last year, considerably faster than total online sales at a 2% growth rate. However, the top 100 retail online sites grew 12%. Consumers clearly preferred the bigger online retail companies last year. Even more impressive, those companies that offer only online sales in the top 500 internet sales sites grew at 20% last year. Consumers are showing a strong preference for those online retailers who live and die with their online performance.
The online-only retailers tell the story of Amazon and the several thousand dwarves. Amazon has a 52% market share of the web-only online sales. The sales statistics and Amazon’s market power suggest that a form of Reliability is holding back the growth of internet retail sales. Consumers would like to know that they will receive the product that they ordered, that the product will work, that, if the product does not work, the retailer will stand behind it and that the retailer will guard the consumer’s credit card information carefully. Amazon has hurdled these barriers well and has reaped the rewards in growth and market share. All the other retailers selling online, especially those outside of the top 100, need to concentrate on creating assurances for their consumers that they can do as well as Amazon in these forms of Reliability.
Subscribe to:
Posts (Atom)
>
