The domestic auto industry has several companies that monitor the quality of automobiles. Some are short-term in nature. The J.D. Power & Associates’ Initial Quality Survey measures the quality of buyer experience over the first ninety days of ownership. Since all automobiles are under warranty during that period, this survey measures the hassle factor associated with early problems.
Much more important is J.D. Power & Associates’ annual Vehicle Dependability Study. This report is the result of analyses of customer perceptions over the first three years of ownership of a vehicle. It better reflects customer experiences with a product. This study recently named Lexus as the number one brand among the thirty-seven brands sold in the U.S.
Durability is a form of Reliability, in our terminology. In a Hostile market, the Reliability segment of customers is usually the largest and most loyal (see “Reliability: The Hard Road to Sustainable Advantage” on StrategyStreet.com). This seems to be true, as well, in the automobile market. J.D. Power notes that durability is the top factor when buyers consider the purchase of their next vehicle. Durability is more important than fuel economy or design of the product.
So, who got the good news on this latest ranking? It comes as no surprise that Toyota distanced itself from its competitors. The company received the highest marks in eleven of the twenty individual award categories. The three U.S. automakers had a total of three individual awards, while Honda, Hyundai and Mazda also had one each.
If the history of other industries has anything to tell us, this Reliability recognition for Toyota guarantees that it will continue gaining market share in the foreseeable future. Given their current size, the U.S. automakers have a cloudier future. They are likely to continue losing share, especially to the Japanese manufacturers.
Thursday, August 28, 2008
Monday, August 25, 2008
Schlitz, Lessons From the Past
“Schlitz, the beer that made Milwaukee famous.” The older baby-boomers among us may remember that advertising slogan. It was all over the media in the 50s and the 60s. Schlitz, after leading the domestic beer industry for most of the first half of the 20th century, disappeared. It has been gone now for a long time. Recently, though, its current owner resuscitated the old brand and formula and re-introduced it to the market. Schlitz is in test phase now, mostly in selected mid-west markets, and its popularity sounds an echo of its former prominence. The story of the rise and fall of Schlitz offers lessons for us, even today.
The Joseph Schlitz Brewing Company was just one of many brewers in Milwaukee in the late nineteenth century. It became a top seller only after the great Chicago fire of 1871 wiped out its Chicago competition. The failure of other brewers gave Schlitz its opening to become a leader in the market. Here is the first lesson. It didn’t “win” its market. It gained its top billing because it was one of the last brewers standing at the time. The failure of a competitor is the source of most share gain in many of the markets that exist today. (See “Failure Shifts More Share Than Success” on StrategyStreet.com.)
In the early years of the 20th century, Schlitz entered its halcyon days. It was the world’s best selling beer for most of the first fifty years of the 20th century. Then, in the mid-1950s, the Milwaukee brewery’s workers interrupted production with a strike. The Schlitz product was scarce on the shelves and other competitors, such as Anheuser-Busch with its Budweiser brand, filled the gap. Budweiser and Anheuser-Busch have held the leading position in the U.S. market since that time.
Here we have a second example of the observation that failure is more likely to move share than is a “win”. Budweiser could not take share from Schlitz as long as Schlitz was readily available on the market. When Schlitz was not available, Budweiser gained share. Then Schlitz had to wait for Budweiser to “fail” before it would gain that share back. Budweiser didn’t fail.
In today’s market, the pilot’s union at United Airlines could learn from this lesson. Their occasional work actions to interrupt service for their employer, United Airlines, has caused that company to cancel several hundred flights. Great idea. Create failure for your employer in the marketplace. Allow others to pick up share that United would have held. Create a smaller airline with lower profits. Have fewer pilots and less revenue available to pay all employees, including the remaining pilots. Where do these pilots learn their economic history?
On with the Schlitz story. Schlitz remained a vibrant and profitable competitor, even after losing its leading share position to Budweiser. In 1970, it still had 12% of th market, compared to Anheuser-Busch’s 18%. Later, in the 1970s, new owners took over the business with the intention of expanding it. In order to do so with little investment, the owners shortened the fermenting process. They also had quality control problems with some of their ingredients that caused the beer to lose its taste. There was a lot of that poor quality beer out in the marketplace. But rather than recall it and correct the situation, the owners decided to weather the storm and sell the defective product in order to create more near-term profits. With this Reliability failure, customers abandoned the brand. By 1981, the Schlitz brewery closed and the Stroh’s Brewing Company from Detroit bought the brand. Stroh’s also struggled and became part of Pabst Brewing Company in 1999.
So we have another lesson from the history of Schlitz. If you fail in Reliability you are in real trouble. The first success of Schlitz came from others’ failure in Convenience. Schlitz had product when others did not. The first failure in the 1950s also came as a result of a failure in Convenience. The product was not available to meet demand. But the most devastating failure was the last one. That was a failure in Reliability. The company delivered a very poor product to customers that had long trusted it to be consistently tasteful. Things like that can be unforgivable. In this case, the Reliability failure was fatal.
So, good luck to the new Schlitz. Let’s hope it learns the lessons of its past and consistently delivers good quality beer in the future.
The Joseph Schlitz Brewing Company was just one of many brewers in Milwaukee in the late nineteenth century. It became a top seller only after the great Chicago fire of 1871 wiped out its Chicago competition. The failure of other brewers gave Schlitz its opening to become a leader in the market. Here is the first lesson. It didn’t “win” its market. It gained its top billing because it was one of the last brewers standing at the time. The failure of a competitor is the source of most share gain in many of the markets that exist today. (See “Failure Shifts More Share Than Success” on StrategyStreet.com.)
In the early years of the 20th century, Schlitz entered its halcyon days. It was the world’s best selling beer for most of the first fifty years of the 20th century. Then, in the mid-1950s, the Milwaukee brewery’s workers interrupted production with a strike. The Schlitz product was scarce on the shelves and other competitors, such as Anheuser-Busch with its Budweiser brand, filled the gap. Budweiser and Anheuser-Busch have held the leading position in the U.S. market since that time.
Here we have a second example of the observation that failure is more likely to move share than is a “win”. Budweiser could not take share from Schlitz as long as Schlitz was readily available on the market. When Schlitz was not available, Budweiser gained share. Then Schlitz had to wait for Budweiser to “fail” before it would gain that share back. Budweiser didn’t fail.
In today’s market, the pilot’s union at United Airlines could learn from this lesson. Their occasional work actions to interrupt service for their employer, United Airlines, has caused that company to cancel several hundred flights. Great idea. Create failure for your employer in the marketplace. Allow others to pick up share that United would have held. Create a smaller airline with lower profits. Have fewer pilots and less revenue available to pay all employees, including the remaining pilots. Where do these pilots learn their economic history?
On with the Schlitz story. Schlitz remained a vibrant and profitable competitor, even after losing its leading share position to Budweiser. In 1970, it still had 12% of th market, compared to Anheuser-Busch’s 18%. Later, in the 1970s, new owners took over the business with the intention of expanding it. In order to do so with little investment, the owners shortened the fermenting process. They also had quality control problems with some of their ingredients that caused the beer to lose its taste. There was a lot of that poor quality beer out in the marketplace. But rather than recall it and correct the situation, the owners decided to weather the storm and sell the defective product in order to create more near-term profits. With this Reliability failure, customers abandoned the brand. By 1981, the Schlitz brewery closed and the Stroh’s Brewing Company from Detroit bought the brand. Stroh’s also struggled and became part of Pabst Brewing Company in 1999.
So we have another lesson from the history of Schlitz. If you fail in Reliability you are in real trouble. The first success of Schlitz came from others’ failure in Convenience. Schlitz had product when others did not. The first failure in the 1950s also came as a result of a failure in Convenience. The product was not available to meet demand. But the most devastating failure was the last one. That was a failure in Reliability. The company delivered a very poor product to customers that had long trusted it to be consistently tasteful. Things like that can be unforgivable. In this case, the Reliability failure was fatal.
So, good luck to the new Schlitz. Let’s hope it learns the lessons of its past and consistently delivers good quality beer in the future.
Monday, August 18, 2008
Will a Silver Strategy Work for United?
Recently, United Airlines announced that it would reduce its service to some of the biggest cities it serves and shift assets to the service of smaller cities. Big cities like Nagoya, Japan and Chicago will lose some service, while cities like Grand Rapids, Michigan and Gillette, Wyoming will gain service.
We have seen this before. In the very early years after airline deregulation, Piedmont Airlines stepped back and watched the largest airlines in the country rush past them to serve the largest cities in the U.S.: New York Chicago, Los Angeles, and so forth. Once the crowd had blown by, Piedmont initiated service to smaller cities, where there was less competition and higher prices. This strategy proved to be very successful for Piedmont. For several years, it enjoyed high profits and a sterling reputation.
So, can United pull off the same strategy? Unlikely. Really, the airline isn’t trying to use a Silver strategy exclusively. Piedmont was a small competitor in the marketplace. TWA, Eastern, American, United, Northwest and Delta were all larger. It had little likelihood of head-to-head success against these larger carriers. Instead, it chose to follow a pattern of competition that has proven successful time and again for smaller competitors. We call this a Silver strategy. (See “Rare Mettle: Gold and Silver Strategies to Succeed in Hostile Markets” in StrategyStreet/Tools/Perspectives.) Part of this strategy is to focus service on segments of customers where there is less competition and where average unit prices are higher. These are always smaller market segments.
This strategy is not appropriate for United. As the number two carrier in the country, it can not succeed in building a Silver strategy without destroying itself in the process.
On the other hand, United is not trying to follow a Silver strategy exclusively. It wants to take advantage of a market that Silver competitors would naturally serve. United is tweaking its strategy on the margin to serve smaller cities with less competition and higher prices per seat mile flown. This set of new markets will complement, rather than replace its big hub and spoke network.
These changes will help, but not save, United. United’s big problem is that it remains a high cost producer in the marketplace, even against some of its large competitors. Until United can stand toe to toe with low cost competitors on equivalent routes, it should continue to weaken in the marketplace. Whether it can do that eventually is as much in the hands of its unions as it is in the control of management. Not promising. See the history of the domestic steel industry.
We have seen this before. In the very early years after airline deregulation, Piedmont Airlines stepped back and watched the largest airlines in the country rush past them to serve the largest cities in the U.S.: New York Chicago, Los Angeles, and so forth. Once the crowd had blown by, Piedmont initiated service to smaller cities, where there was less competition and higher prices. This strategy proved to be very successful for Piedmont. For several years, it enjoyed high profits and a sterling reputation.
So, can United pull off the same strategy? Unlikely. Really, the airline isn’t trying to use a Silver strategy exclusively. Piedmont was a small competitor in the marketplace. TWA, Eastern, American, United, Northwest and Delta were all larger. It had little likelihood of head-to-head success against these larger carriers. Instead, it chose to follow a pattern of competition that has proven successful time and again for smaller competitors. We call this a Silver strategy. (See “Rare Mettle: Gold and Silver Strategies to Succeed in Hostile Markets” in StrategyStreet/Tools/Perspectives.) Part of this strategy is to focus service on segments of customers where there is less competition and where average unit prices are higher. These are always smaller market segments.
This strategy is not appropriate for United. As the number two carrier in the country, it can not succeed in building a Silver strategy without destroying itself in the process.
On the other hand, United is not trying to follow a Silver strategy exclusively. It wants to take advantage of a market that Silver competitors would naturally serve. United is tweaking its strategy on the margin to serve smaller cities with less competition and higher prices per seat mile flown. This set of new markets will complement, rather than replace its big hub and spoke network.
These changes will help, but not save, United. United’s big problem is that it remains a high cost producer in the marketplace, even against some of its large competitors. Until United can stand toe to toe with low cost competitors on equivalent routes, it should continue to weaken in the marketplace. Whether it can do that eventually is as much in the hands of its unions as it is in the control of management. Not promising. See the history of the domestic steel industry.
Monday, August 11, 2008
How the High End Company is Vulnerable
The housing market is in a shambles, especially the new home construction market. In partial response to this horrible market, some of the home building industry’s largest competitors, including Toll Brothers and Hovnanian Enterprises, have entered the custom home market. Their entry illustrates the strengths of companies at the high end and exposes their vulnerability.
In the custom home market, small builders design and build homes for customers who own their own lots. These customers go to these high end builders because of Function. The builders will design and build exactly what the customer wants. The Features and Functions of the home are precisely built to the customer’s specifications. (See “How Customers Buy” in StrategyStreet.com/Tools/Perspectives.) We call companies at the high end of the product spectrum Performance Leaders. These companies usually offer Functions that the industry’s largest competitors, whom we call Standard Leaders, do not offer. (See “Success Under Fire: Policies to Prosper in Hostile Times” in StrategyStreet.com/Tools/Perspectives.)
There is not much of a market for the Standard Leaders in home building today. New home construction rates are near historic lows. In search of some market, then, these Standard Leader builders have begun offering custom-built homes. There are two types of these homes: semi-custom homes, which are developed from the builders’ pre-drawn plans; and custom homes, which are built to the buyer’s specific specifications. The Standard Leaders are entering the Performance Leader’s territory with both semi-custom and custom homes.
Why would a custom home customer buy a Performance Leader product, such as a custom home, from a Standard Leader company? There are three answers to this question. The first answer is that the customer wants Reliability. These customers want to be sure that the project will be finished as promised. These Standard Leader builders have more resources available to them and have a proven capability to complete a project, where sometimes Performance Leader builders might falter. Second, the customers for the custom home buy on Convenience. Some of these customers have found that the Standard Leader builders can produce a custom home in half the time it takes for the Performance Leader builder to complete the project. Finally, these custom home customers also buy on Price. The economies of scale that the Standard Leader builders can bring to the Performance Leader product category enable them to offer lower prices, per square foot of home. In fact, these prices can be as much as 25% below those of the Performance Leader custom home prices.
Performance Leaders are usually strong on Function. But Standard Leaders can attack their market, offering better Reliability, Convenience and Price. The Standard Leaders’ high end product is “almost as good as” that of the Performance Leader company’s product, but it is much cheaper.
This Standard Leader attack from below pattern has recurred many times. Another example is the Lexus line of automobiles offered by Toyota. In the early years of Lexus’ debut, Toyota priced the Lexus at a breathtakingly low price compared to its competition from Mercedes and BMW, among others. This price advantage shot Lexus into the market. Today, the Lexus enjoys a much higher price level but it is still less expensive than BMW or Mercedes.
In the custom home market, small builders design and build homes for customers who own their own lots. These customers go to these high end builders because of Function. The builders will design and build exactly what the customer wants. The Features and Functions of the home are precisely built to the customer’s specifications. (See “How Customers Buy” in StrategyStreet.com/Tools/Perspectives.) We call companies at the high end of the product spectrum Performance Leaders. These companies usually offer Functions that the industry’s largest competitors, whom we call Standard Leaders, do not offer. (See “Success Under Fire: Policies to Prosper in Hostile Times” in StrategyStreet.com/Tools/Perspectives.)
There is not much of a market for the Standard Leaders in home building today. New home construction rates are near historic lows. In search of some market, then, these Standard Leader builders have begun offering custom-built homes. There are two types of these homes: semi-custom homes, which are developed from the builders’ pre-drawn plans; and custom homes, which are built to the buyer’s specific specifications. The Standard Leaders are entering the Performance Leader’s territory with both semi-custom and custom homes.
Why would a custom home customer buy a Performance Leader product, such as a custom home, from a Standard Leader company? There are three answers to this question. The first answer is that the customer wants Reliability. These customers want to be sure that the project will be finished as promised. These Standard Leader builders have more resources available to them and have a proven capability to complete a project, where sometimes Performance Leader builders might falter. Second, the customers for the custom home buy on Convenience. Some of these customers have found that the Standard Leader builders can produce a custom home in half the time it takes for the Performance Leader builder to complete the project. Finally, these custom home customers also buy on Price. The economies of scale that the Standard Leader builders can bring to the Performance Leader product category enable them to offer lower prices, per square foot of home. In fact, these prices can be as much as 25% below those of the Performance Leader custom home prices.
Performance Leaders are usually strong on Function. But Standard Leaders can attack their market, offering better Reliability, Convenience and Price. The Standard Leaders’ high end product is “almost as good as” that of the Performance Leader company’s product, but it is much cheaper.
This Standard Leader attack from below pattern has recurred many times. Another example is the Lexus line of automobiles offered by Toyota. In the early years of Lexus’ debut, Toyota priced the Lexus at a breathtakingly low price compared to its competition from Mercedes and BMW, among others. This price advantage shot Lexus into the market. Today, the Lexus enjoys a much higher price level but it is still less expensive than BMW or Mercedes.
Thursday, August 7, 2008
Consolidation in the Waste Industry
The leading waste management company, Waste Management Inc., has just offered to buy the number three ranked competitor, Republic Services. This offer preempts Republic’s offer to purchase the number two competitor in the industry, Allied Waste Industries.
Before these acquisitions, the waste industry was about average in its degree of consolidation. The three largest U.S. waste companies control about two-thirds of the nation’s permitted landfill capacity. In the average large industry, the top three competitors have about 68% of total industry sales (see the Tools/Benchmarks/Quartile Ranking Reports/Marketshare in StrategyStreet.com).
If Waste Management’s offer is successful, it will then control 50% of the country’s permitted landfill capacity. This 50% compares with the median industry leader among large industries with a market share of 38% of sales. This is a very strong position.
Before these acquisitions, the waste industry was about average in its degree of consolidation. The three largest U.S. waste companies control about two-thirds of the nation’s permitted landfill capacity. In the average large industry, the top three competitors have about 68% of total industry sales (see the Tools/Benchmarks/Quartile Ranking Reports/Marketshare in StrategyStreet.com).
If Waste Management’s offer is successful, it will then control 50% of the country’s permitted landfill capacity. This 50% compares with the median industry leader among large industries with a market share of 38% of sales. This is a very strong position.
Monday, August 4, 2008
GM in a No Win Position
You have to feel sorry for the beleaguered leaders of General Motors. The company is suffering through a perfect storm. Automobile sales this year will be fourteen million units, down from the sixteen million the company had expected. Down even more are sales of large SUVs and trucks, on which GM had pinned its hopes for profitability and cash flow.
The company is now down to about six months of certain liquidity. After that, there is great uncertainty.
The company has announced new rounds of lay-offs and restructuring to enable the firm to return to profitability. These plans are unlikely to be successful for one simple reason: GM’s problem is not just the current costs of producing an automobile or a truck. The company is hemmed in by fixed costs of servicing a unionized and white collar retiree group with benefits negotiated during a time when GM was a much bigger, and more successful, company. There are various estimates for how much these fixed costs are, ranging from $1000 to $1500 per automobile.
GM can not hope to overcome this disadvantage at its present size. It is competing in a market with very efficient Japanese competitors, unburdened by these high fixed costs of retirees. So, even assuming that GM could reach the same cash costs of producing a world-class automobile as can Toyota and Honda, that still leaves them well short of the amount the company needs to pay for retiree benefits. The company is gradually being dragged under by old promises that even it can no longer meet.
GM is cutting costs where it can save cash today. Inevitably, some costs will go at the expense of customer benefits, in features, reliability or convenience. This can only make worse the first problem GM faces, a value proposition, its performance for price, that customers deem unworthy. (See our July 7, 2008 blog: "Value in Two Hostile Industries".)
The company is now down to about six months of certain liquidity. After that, there is great uncertainty.
The company has announced new rounds of lay-offs and restructuring to enable the firm to return to profitability. These plans are unlikely to be successful for one simple reason: GM’s problem is not just the current costs of producing an automobile or a truck. The company is hemmed in by fixed costs of servicing a unionized and white collar retiree group with benefits negotiated during a time when GM was a much bigger, and more successful, company. There are various estimates for how much these fixed costs are, ranging from $1000 to $1500 per automobile.
GM can not hope to overcome this disadvantage at its present size. It is competing in a market with very efficient Japanese competitors, unburdened by these high fixed costs of retirees. So, even assuming that GM could reach the same cash costs of producing a world-class automobile as can Toyota and Honda, that still leaves them well short of the amount the company needs to pay for retiree benefits. The company is gradually being dragged under by old promises that even it can no longer meet.
GM is cutting costs where it can save cash today. Inevitably, some costs will go at the expense of customer benefits, in features, reliability or convenience. This can only make worse the first problem GM faces, a value proposition, its performance for price, that customers deem unworthy. (See our July 7, 2008 blog: "Value in Two Hostile Industries".)
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