Few industry leaders believe their prices are too high. Often, they are right. They are usually less right in a market where prices fall. Consider GM in automobiles and IBM in personal computers in the past. At one time or another, most industry leaders will get caught in a Leader’s Trap, where they assume that customers will stay loyal to their products because the low-end products do not enjoy their quality and reputation. This assumption rarely, if ever, holds. Best Buy has been in a Leader’s Trap and its assumptions won’t hold this time either.
Through the third quarter of 2009, Best Buy was gaining market share in flat panel TVs and personal computers. However, in the most recent quarter of 2010, the company lost over 1% of its market share in televisions and computers to competitors who were discounting. (See the Perspective, “The Two Best Consultants in the World” on StrategyStreet.com.) Now, if it were just a simple low-end, low value competitor, Best Buy might not worry. But their discounting competition was Wal-Mart and Amazon. By any definition, these companies would count as peers of Best Buy in the television and personal computer retail market.
In the recent quarter, Best Buy emphasized high technology, and high margined, TV and personal computer products. Customers did not follow along. Best Buy noted that it had faced tough competition from off brand televisions at lower price points.
Best Buy could have offered private label products to compete with low-end, off brand, competitors. Its store brands include Dynex and Insignia. The company decided not to emphasize these lower-priced products in their promotions because they have low profit margins. Best Buy “failed” its customer by refusing to offer something that at least half the other competitors could and would offer. (See “Audio Tip #35: How Does a Company “Fail” in a Market?” on StrategyStreet.com.) Nor did competition “win” the customers who switched. Amazon and Wal-Mart simply took what Best Buy allowed them to take. (See “Audio Tip #34: How Does a Company “Win” in a Market?” on StrategyStreet.com.)
The result: Best Buy missed its targets and saw its stock price fall by 15%. The company lost market share to peer competitors. And its sales and profits fell in televisions and personal computers. Competitors gained strength.
Best Buy is a fine company with capable management. It won’t stay down for long. You may expect to see them leave the Leader’s Trap very soon.
Showing posts with label IBM. Show all posts
Showing posts with label IBM. Show all posts
Monday, January 24, 2011
Thursday, September 23, 2010
Apple's Future in Smart Phones - Part I
Apple is the clear leader in today’s consumer smart phone market. Research in Motion leads the commercial market. I am going to make the case that a few years from now, they will have a single digit market share. They will turn into a Performance Leader, a small high-priced competitor in the market. This position will be similar to the one Apple holds today in the personal computer market. It appears that Apple is following the same pathway it followed in the personal computer market. Perhaps a bit of history is helpful here.
The business model of Apple differed from that of the PC. Apple was not the first personal computer, but it was, by far, the best. And, it got paid for being the best. Apple really created the mass market for personal computers. It had a huge percentage of the marketplace by the time 1981 rolled around and IBM introduced the PC. Apple controlled both the hardware and the software for its personal computer products. On the PC side, Microsoft’s Windows controlled the software, while a large number of companies became hardware producers for the Windows operating system. In the early years of the personal computer, the hardware was far more expensive than the software.
The PC market had a great deal more competition…and cost/price reductions. Apple prevented any other hardware producer from copying its products. There was at least one company who tried, Franklin Computer. But Apple killed them off in the mid-1980s. From that point on, there were no clone producers of Apple machines. The picture was very different on the IBM/Microsoft side. IBM found itself facing many competitors. Most of those competitors we called “clones.” Dell was one of those clones. This large number of hardware competitors reduced the cost of hardware drastically during the late 80s and through the 90s. (See “Audio Tip #196: Why Economies of Scales Exist” on StrategyStreet.com.) The source of much of the cost of the hardware for a personal computer shifted to the Intel or AMD chips embedded in the hardware. Still, AMD constantly challenged Intel, so Intel had to reduce its prices in order to maintain its very high market shares in chips. All of this intense competition reduced the cost of hardware until today the software costs as much as the hardware. Competition forced hardware components and prices down to such an extent that the PC platform had significant price advantages over the Macintosh/Apple platform. Apple was pushed into a high-cost/high-priced hardware position.
The competition in software was much less pronounced. It has only been in the last few years that Microsoft has had to respond to lower cost competition from Linux and Google. These lower cost competitors have had an impact on Microsoft’s prices, but nothing like the impact that the hardware competition had in reducing the price of hardware. The mass market followed the lower priced PC market. Apple today produces a marvelous machine. It has rabid and loyal fans. It also has high prices and a single digit share of the personal computer market. Were it not for the genius of Steve Jobs and his cohorts at Apple inventing new products with higher margins, Apple would be struggling today, much as it was before Steve Jobs returned to the company. It wouldn’t make a lot of money in the personal computer industry because the industry Standard Leaders, the PC producers, are so cost effective, and so much lower in price, than is Apple.
In Part II, we will see how this same pattern is playing out in the smart phone market.
The business model of Apple differed from that of the PC. Apple was not the first personal computer, but it was, by far, the best. And, it got paid for being the best. Apple really created the mass market for personal computers. It had a huge percentage of the marketplace by the time 1981 rolled around and IBM introduced the PC. Apple controlled both the hardware and the software for its personal computer products. On the PC side, Microsoft’s Windows controlled the software, while a large number of companies became hardware producers for the Windows operating system. In the early years of the personal computer, the hardware was far more expensive than the software.
The PC market had a great deal more competition…and cost/price reductions. Apple prevented any other hardware producer from copying its products. There was at least one company who tried, Franklin Computer. But Apple killed them off in the mid-1980s. From that point on, there were no clone producers of Apple machines. The picture was very different on the IBM/Microsoft side. IBM found itself facing many competitors. Most of those competitors we called “clones.” Dell was one of those clones. This large number of hardware competitors reduced the cost of hardware drastically during the late 80s and through the 90s. (See “Audio Tip #196: Why Economies of Scales Exist” on StrategyStreet.com.) The source of much of the cost of the hardware for a personal computer shifted to the Intel or AMD chips embedded in the hardware. Still, AMD constantly challenged Intel, so Intel had to reduce its prices in order to maintain its very high market shares in chips. All of this intense competition reduced the cost of hardware until today the software costs as much as the hardware. Competition forced hardware components and prices down to such an extent that the PC platform had significant price advantages over the Macintosh/Apple platform. Apple was pushed into a high-cost/high-priced hardware position.
The competition in software was much less pronounced. It has only been in the last few years that Microsoft has had to respond to lower cost competition from Linux and Google. These lower cost competitors have had an impact on Microsoft’s prices, but nothing like the impact that the hardware competition had in reducing the price of hardware. The mass market followed the lower priced PC market. Apple today produces a marvelous machine. It has rabid and loyal fans. It also has high prices and a single digit share of the personal computer market. Were it not for the genius of Steve Jobs and his cohorts at Apple inventing new products with higher margins, Apple would be struggling today, much as it was before Steve Jobs returned to the company. It wouldn’t make a lot of money in the personal computer industry because the industry Standard Leaders, the PC producers, are so cost effective, and so much lower in price, than is Apple.
In Part II, we will see how this same pattern is playing out in the smart phone market.
Monday, March 8, 2010
Pricing Myths
There is a price war going on in the retail liquor department. This is good news for those of us who enjoy a drink but bad news for the liquor companies.
It seems that consumers have been switching their purchases to less expensive brands of liquor during the recession. They are not drinking less, though. (See the Symptom & Implication, “Low end products are gaining share of the market” on StrategyStreet.com.) The volume of spirits sold in 2009 was up by 1.4%, but the revenue remained flat due to price discounting and consumers shifting to cheaper brands.
Diageo, the world’s largest liquor producer, is part of the industry’s problem. This company has been aggressive in reducing its prices with the two-fold purpose of holding on to their current customers and gaining share against other liquor producers. The falling prices are most obvious with vodka, tequila and gin. Some competitors of Diageo are refusing to go along with the price discount. For example, Patron, the maker of Patron tequila, has resisted the price cutting. (See the Symptom & Implication, “Some competitors seek price increases more aggressively than others” on StrategyStreet.com.) The CEO of Diageo believes that his discounting has helped the company gain market share and retain consumers. Still, his revenues are off compared to the previous year.
The equity analysts believe that price discounting will hurt Diageo’s brand equity. I disagree.
The history of many markets is replete with examples of branded goods who have had to discount during difficult times. Remember Marlboro Tuesday? How about the price wars in the 80s and 90s in beer, disposable diapers, fast food, tires, farm machinery, construction equipment, appliances and personal computers, to name just a few? Companies must respond to shifting consumer preferences and most price discounting.
An industry in overcapacity is certain to experience price discounting. It is true that this causes customers to become more price-sensitive, but that price sensitivity lasts only as long as industry competitors will discount against one another. (See “Video #11: What Ends Hostility” on StrategyStreet.com.) Once the period of discounting has passed, companies regain pricing power and branded equity is as strong as it ever was. For proof, consider the brand leaders in the industries cited in the previous paragraph.
Part of a company’s brand equity with consumers is the fact that the company is viewed as pricing “reasonably” with competitors. If a company will not price with rough equivalence to its competition, it also destroys its brand equity. Consider General Motors in the 80s, IBM in the personal computer market and Xerox in copiers. You don’t want a reputation as someone who prices high just because you believe that your brand is better than everyone else’s. That way leads to big troubles.
It seems that consumers have been switching their purchases to less expensive brands of liquor during the recession. They are not drinking less, though. (See the Symptom & Implication, “Low end products are gaining share of the market” on StrategyStreet.com.) The volume of spirits sold in 2009 was up by 1.4%, but the revenue remained flat due to price discounting and consumers shifting to cheaper brands.
Diageo, the world’s largest liquor producer, is part of the industry’s problem. This company has been aggressive in reducing its prices with the two-fold purpose of holding on to their current customers and gaining share against other liquor producers. The falling prices are most obvious with vodka, tequila and gin. Some competitors of Diageo are refusing to go along with the price discount. For example, Patron, the maker of Patron tequila, has resisted the price cutting. (See the Symptom & Implication, “Some competitors seek price increases more aggressively than others” on StrategyStreet.com.) The CEO of Diageo believes that his discounting has helped the company gain market share and retain consumers. Still, his revenues are off compared to the previous year.
The equity analysts believe that price discounting will hurt Diageo’s brand equity. I disagree.
The history of many markets is replete with examples of branded goods who have had to discount during difficult times. Remember Marlboro Tuesday? How about the price wars in the 80s and 90s in beer, disposable diapers, fast food, tires, farm machinery, construction equipment, appliances and personal computers, to name just a few? Companies must respond to shifting consumer preferences and most price discounting.
An industry in overcapacity is certain to experience price discounting. It is true that this causes customers to become more price-sensitive, but that price sensitivity lasts only as long as industry competitors will discount against one another. (See “Video #11: What Ends Hostility” on StrategyStreet.com.) Once the period of discounting has passed, companies regain pricing power and branded equity is as strong as it ever was. For proof, consider the brand leaders in the industries cited in the previous paragraph.
Part of a company’s brand equity with consumers is the fact that the company is viewed as pricing “reasonably” with competitors. If a company will not price with rough equivalence to its competition, it also destroys its brand equity. Consider General Motors in the 80s, IBM in the personal computer market and Xerox in copiers. You don’t want a reputation as someone who prices high just because you believe that your brand is better than everyone else’s. That way leads to big troubles.
Monday, March 30, 2009
Cisco's New Server Product
Cisco recently announced that it was entering the server market. Details are sketchy right now, but we might take a brief look at what Cisco needs to do to be successful. We will use the Customer Buying Hierarchy as our analytical tool.
A bit of background. Cisco is entering the market for servers in order to increase the amount of the global IT purchase that it is able to address. Cisco claims that today it addresses about 10% of the total annual purchase of IT products. With the introduction of its server product, it believes that it will address 25% of that market.
But growth is not all that is pushing Cisco in the direction of servers. Hewlett Packard looms. Over the last few years, HP has developed and improved its ProCurve networking gear product line. This product line competes directly with Cisco routers and switches. Cisco may feel compelled to respond to HP’s forays into its market by counter-attacking in the server market. (See the Symptom and Implication, “Some competitors proliferate products around the heart of the market” on StrategyStreet.com.)
The Customer Buying Hierarchy holds that customers buy using four criteria: Function, Reliability, Convenience and Price. They use these criteria in that order for all purchases. Let’s use that Customer Buying Hierarchy to evaluate what we know of Cisco’s offering.
Function: Function refers to the characteristics of the product that affect the way the product is used by the customer. It includes all the features of a product. Cisco is entering the high-end of the server market, where margins are good and there seems to be some product differentiation among the competitors. We don’t know anything about the server itself, but the company’s offering integrates the server, networking components, data storage and virtualization software in one integrated package. It appears that the company is offering the hardware/software equivalent of Microsoft’s Windows/Office products. Everything works seamlessly together. These functions individually are not unique. The unique function is that they are all integrated together already in one package. This may give the customer a greater sense that the components will work well together. And it may enable some customers to avoid the cost of services they have needed previously to integrate these components in their IT locations. Cisco is offering a clear functional improvement.
Reliability: Reliability refers to the consistency with which the company delivers on promises made or implied to the customer by its product. There is good news and bad news here for Cisco. The good news is that the company has a sterling reputation for Reliability. Industry analysts claim that Cisco is rarely the Function leader in the industry, but Cisco treats their customers very well and ensures that the customer never gets in trouble using Cisco. It has a powerful reputation with customers as someone you can count on. So, what is the bad news? Cisco’s reputation for Reliability resides in network gear, not in servers. In servers, IBM and Hewlett Packard also have sterling reputations as companies capable of and willing to deliver superb customer service. IT customers trust all three of these companies. But if push comes to shove, wouldn’t the average IT customer trust IBM or HP more in the server product line? Cisco has a hurdle to overcome here. It must find a way to ensure customers that it will help them avoid all potential products from the new Cisco server. This may not be an easy task.
Convenience: This term refers to the ease with which the customer may acquire the product. Cisco looks to be in very good shape. There are several good companies who have signed on to add technology and sales to the Cisco product. Among the partners are such names as Accenture, EMC, Microsoft, VMWare, Red Hat and BMC Software. Customers will have no trouble finding the product and buying it.
Price: We don’t know what Cisco plans to charge for its new server product. One thing is certain. Its price has to be lower than a customer could purchase a high-end blade server and the services to install it. The new product line’s major benefit is that it integrates a number of components already available on the market. (See the Symptom and Implication, “Competitors are changing features of the product” on StrategyStreet.com.) Cisco can not charge more for the integration than the customer would pay to someone else for a final integrated product. In fact, Cisco will have to demonstrate to the customer that it is clearly cheaper to purchase their product than a blade server and accompanying integration services from HP or IBM. Pricing is a big unknown here.
Since we don’t know pricing, we can not reach a final conclusion. However, Cisco has taken on a big challenge here. This will not be easy. In order for this new initiative to produce the kind of results that Cisco hopes for, it is likely that its competitors, HP and IBM, are going to have to fail their customers in some way to enable HP to gain a major share of the market. Current IBM and HP customers are likely to grant these companies time to copy the unique benefits Cisco offers. In most mature markets, competitor failure is as important as a product benefit win in moving market share. (See the Symptom and Implication, “Share is tougher to shift” on StrategyStreet.com.) HP and IBM could fail if they do not create an equivalent benefit and then match Cisco’s prices. This is a tough challenge, but Cisco has met tough challenges before.
A bit of background. Cisco is entering the market for servers in order to increase the amount of the global IT purchase that it is able to address. Cisco claims that today it addresses about 10% of the total annual purchase of IT products. With the introduction of its server product, it believes that it will address 25% of that market.
But growth is not all that is pushing Cisco in the direction of servers. Hewlett Packard looms. Over the last few years, HP has developed and improved its ProCurve networking gear product line. This product line competes directly with Cisco routers and switches. Cisco may feel compelled to respond to HP’s forays into its market by counter-attacking in the server market. (See the Symptom and Implication, “Some competitors proliferate products around the heart of the market” on StrategyStreet.com.)
The Customer Buying Hierarchy holds that customers buy using four criteria: Function, Reliability, Convenience and Price. They use these criteria in that order for all purchases. Let’s use that Customer Buying Hierarchy to evaluate what we know of Cisco’s offering.
Function: Function refers to the characteristics of the product that affect the way the product is used by the customer. It includes all the features of a product. Cisco is entering the high-end of the server market, where margins are good and there seems to be some product differentiation among the competitors. We don’t know anything about the server itself, but the company’s offering integrates the server, networking components, data storage and virtualization software in one integrated package. It appears that the company is offering the hardware/software equivalent of Microsoft’s Windows/Office products. Everything works seamlessly together. These functions individually are not unique. The unique function is that they are all integrated together already in one package. This may give the customer a greater sense that the components will work well together. And it may enable some customers to avoid the cost of services they have needed previously to integrate these components in their IT locations. Cisco is offering a clear functional improvement.
Reliability: Reliability refers to the consistency with which the company delivers on promises made or implied to the customer by its product. There is good news and bad news here for Cisco. The good news is that the company has a sterling reputation for Reliability. Industry analysts claim that Cisco is rarely the Function leader in the industry, but Cisco treats their customers very well and ensures that the customer never gets in trouble using Cisco. It has a powerful reputation with customers as someone you can count on. So, what is the bad news? Cisco’s reputation for Reliability resides in network gear, not in servers. In servers, IBM and Hewlett Packard also have sterling reputations as companies capable of and willing to deliver superb customer service. IT customers trust all three of these companies. But if push comes to shove, wouldn’t the average IT customer trust IBM or HP more in the server product line? Cisco has a hurdle to overcome here. It must find a way to ensure customers that it will help them avoid all potential products from the new Cisco server. This may not be an easy task.
Convenience: This term refers to the ease with which the customer may acquire the product. Cisco looks to be in very good shape. There are several good companies who have signed on to add technology and sales to the Cisco product. Among the partners are such names as Accenture, EMC, Microsoft, VMWare, Red Hat and BMC Software. Customers will have no trouble finding the product and buying it.
Price: We don’t know what Cisco plans to charge for its new server product. One thing is certain. Its price has to be lower than a customer could purchase a high-end blade server and the services to install it. The new product line’s major benefit is that it integrates a number of components already available on the market. (See the Symptom and Implication, “Competitors are changing features of the product” on StrategyStreet.com.) Cisco can not charge more for the integration than the customer would pay to someone else for a final integrated product. In fact, Cisco will have to demonstrate to the customer that it is clearly cheaper to purchase their product than a blade server and accompanying integration services from HP or IBM. Pricing is a big unknown here.
Since we don’t know pricing, we can not reach a final conclusion. However, Cisco has taken on a big challenge here. This will not be easy. In order for this new initiative to produce the kind of results that Cisco hopes for, it is likely that its competitors, HP and IBM, are going to have to fail their customers in some way to enable HP to gain a major share of the market. Current IBM and HP customers are likely to grant these companies time to copy the unique benefits Cisco offers. In most mature markets, competitor failure is as important as a product benefit win in moving market share. (See the Symptom and Implication, “Share is tougher to shift” on StrategyStreet.com.) HP and IBM could fail if they do not create an equivalent benefit and then match Cisco’s prices. This is a tough challenge, but Cisco has met tough challenges before.
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