Recently, Google announced that it was creating an operating system to work on the new small netbook computers. Netbooks are the only part of the PC market that is growing today. Google hopes to introduce an operating system there in order to serve as a stalking horse to slip into Microsoft’s share with desktop and notebook PCs.
Also, Cisco has let it be known that it was considering offering a rival to Microsoft’s Office software. This service would let business users create documents they could draft and share through Cisco’s WebEx meeting and collaboration service. Google has already attempted to best Microsoft in the Office world with its Google Apps internet-based alternative. Google has yet to create much traction with this product. The outlook for Cisco’s product must wait until it actually appears. But the point here is al the new competition.
Why is Microsoft seeing so much new competition in markets where it is the overwhelming dominant leader? Because its prices are so high. It is drawing competitors into the marketplace who want a piece of Microsoft’s enormous profit base. (See Audio Tip #119: A Price Umbrella on StrategyStreet.com.) These competitive forays are likely to continue as long as Microsoft holds the high price umbrella over them. These new competitors have a mighty mountain to climb, so they might not succeed. On the other hand, one of them just might and create real pain for Microsoft. Linux has already damaged Microsoft in some of the large markets that Microsoft serves. (See Audio Tip #102: When is Price Likely to go Down? on StrategyStreet.com.)
Interestingly, Cisco specifically stated that it was not interested in competing with Salesforce.com in selling online applications for corporate users. You probably wonder why. So did I. Here’s why. Microsoft has the following results on a trailing twelve month basis: Operating Margins 37% and Return on Equity 42%. In contrast, Salesforce.com has these results on a trailing twelve month basis: Operating Margins of 7% and Return on Equity 9%. I guess the price and profit umbrella held up by Salesforce just doesn’t allow even big companies to crawl in underneath.
Showing posts with label success and failure. Show all posts
Showing posts with label success and failure. Show all posts
Monday, July 13, 2009
Monday, March 16, 2009
An Answer for Pizza Problems?
The pizza industry is struggling. It has been struggling for some time, well before the recession put its icy grip on the industry’s throat. The costs of pizza ingredients have caused the prices in the industry to rise. The industry has always had to struggle with its less-than-healthy reputation. So, for some time, the industry has been losing share to healthier and fresher competition on the one hand, and less pricey hamburger and sandwich competitors on the other.
One company, Domino’s, is responding to these challenges by broadening its menu. It is beginning to sell toasted sub sandwiches in competition with Subway and Quiznos. This is not a promising development for Domino’s.
Subway and Quiznos are already fighting a price war. You have probably seen the ads for “A Footlong For $5” at Subway. The sandwich business, while apparently similar to pizza as a fast-food business, is still a different business than is the pizza business. Other very good fast-food firms have entered different fast-food businesses without success. One notable example is McDonalds. Several years ago, it tried to sell pizza in its stores and failed miserably.
You may see other companies expanding into new businesses that are apparently related to their own business. When you see that, beware. (See the Perspective, “Finding the Open Door” on StrategyStreet.com.) Some years ago a manufacturer watched as its competitors began buying into the distribution channel for its product. In a panic, the company decided that it had to do the same thing or lose its customer base. So it, and most of its competitors, entered the distribution business. The manufacturer had assumed that it would have an advantage in the distribution business because it made the product that would be sold there. Naturally, the distributors who were not purchased by the manufacturers became very upset. In addition, the manufacturers knew little about how to make a success of the distribution business. The result was a very expensive failure for all of the manufacturers who entered the distribution business. The distribution business had different customers with completely different needs than the customers of the manufacturing business. The manufacturers had no real advantages in this business.
Before a company expands into a related business, it needs to be clear on exactly where it has advantages over people already in the business. Otherwise, disaster awaits.
One company, Domino’s, is responding to these challenges by broadening its menu. It is beginning to sell toasted sub sandwiches in competition with Subway and Quiznos. This is not a promising development for Domino’s.
Subway and Quiznos are already fighting a price war. You have probably seen the ads for “A Footlong For $5” at Subway. The sandwich business, while apparently similar to pizza as a fast-food business, is still a different business than is the pizza business. Other very good fast-food firms have entered different fast-food businesses without success. One notable example is McDonalds. Several years ago, it tried to sell pizza in its stores and failed miserably.
You may see other companies expanding into new businesses that are apparently related to their own business. When you see that, beware. (See the Perspective, “Finding the Open Door” on StrategyStreet.com.) Some years ago a manufacturer watched as its competitors began buying into the distribution channel for its product. In a panic, the company decided that it had to do the same thing or lose its customer base. So it, and most of its competitors, entered the distribution business. The manufacturer had assumed that it would have an advantage in the distribution business because it made the product that would be sold there. Naturally, the distributors who were not purchased by the manufacturers became very upset. In addition, the manufacturers knew little about how to make a success of the distribution business. The result was a very expensive failure for all of the manufacturers who entered the distribution business. The distribution business had different customers with completely different needs than the customers of the manufacturing business. The manufacturers had no real advantages in this business.
Before a company expands into a related business, it needs to be clear on exactly where it has advantages over people already in the business. Otherwise, disaster awaits.
Monday, November 10, 2008
Nearing End Game for the Domestic Auto Industry
Consumer Reports recently had a load of bad news for the domestic auto manufacturers. The big car retailers had even worse news.
Consumer Reports issued a report showing that the three domestic automobile manufacturers, GM, Ford and Chrysler, trailed Asian manufacturers in quality. The Chrysler cars were rated very low on the quality scale. The GM cars were hit and miss: some of good quality, others of poor quality. Ford generally rates as the best of the domestic automobile manufacturers in automobile quality. The knock on Ford from Consumer Reports is that its car styling was boring.
We have observed, through thousands of customer interviews that all customers purchase using a hierarchy of criteria: Function, Reliability, Convenience and Price, in that order. (See “How Customers Buy” in the Perspectives section of StrategyStreet.) Automobile styling is a form of Function. Automobile quality is a measure of Reliability. In all Hostile markets, those industries with overcapacity, the winners in the industry succeed on the basis of high Reliability. Function and Price usually mean little because competitors copy any successful Function or Price innovation very quickly. Convenience is important. However, a company that loses its Reliability will also lose its Convenience, even if it is the leader in the industry.
The domestic auto manufacturers have lost their reputation for high Reliability. Now they are losing their Convenience, as the big car retailers write off the value of their domestic branded stores. Recently, the third and the fourth largest automobile retail chains, Sonic and Group 1, wrote off the major portion of their remaining investment in GM, Ford and Chrysler stores. In each case, the dealerships of the big three automakers accounted for less than 20% of the sales in the group. These big retailers are Very Large wholesale customers, those who determine the future of the industry and the Convenience with which retail customers may purchase automobiles. Many of the domestic brand of stores will close, particularly in these large dealership groups. Very few new outlets will open. As a result, the Convenience advantages previously enjoyed by the domestic automobile manufacturers slowly ebb away. That leaves them with little left to stand on. Neither Function nor Price will save them. Convenience has been their major strong point, but they are losing that as their Reliability slips.
You might ask why Reliability has slipped. The companies made choices that reduced the quality of their automobiles. This is an example of a self-defeating cost reduction, which sinks many competitors in Hostile marketplaces. (See “Success Under Fire: Policies to Prosper in Hostile Times” in StrategyStreet.com.)
Consumer Reports issued a report showing that the three domestic automobile manufacturers, GM, Ford and Chrysler, trailed Asian manufacturers in quality. The Chrysler cars were rated very low on the quality scale. The GM cars were hit and miss: some of good quality, others of poor quality. Ford generally rates as the best of the domestic automobile manufacturers in automobile quality. The knock on Ford from Consumer Reports is that its car styling was boring.
We have observed, through thousands of customer interviews that all customers purchase using a hierarchy of criteria: Function, Reliability, Convenience and Price, in that order. (See “How Customers Buy” in the Perspectives section of StrategyStreet.) Automobile styling is a form of Function. Automobile quality is a measure of Reliability. In all Hostile markets, those industries with overcapacity, the winners in the industry succeed on the basis of high Reliability. Function and Price usually mean little because competitors copy any successful Function or Price innovation very quickly. Convenience is important. However, a company that loses its Reliability will also lose its Convenience, even if it is the leader in the industry.
The domestic auto manufacturers have lost their reputation for high Reliability. Now they are losing their Convenience, as the big car retailers write off the value of their domestic branded stores. Recently, the third and the fourth largest automobile retail chains, Sonic and Group 1, wrote off the major portion of their remaining investment in GM, Ford and Chrysler stores. In each case, the dealerships of the big three automakers accounted for less than 20% of the sales in the group. These big retailers are Very Large wholesale customers, those who determine the future of the industry and the Convenience with which retail customers may purchase automobiles. Many of the domestic brand of stores will close, particularly in these large dealership groups. Very few new outlets will open. As a result, the Convenience advantages previously enjoyed by the domestic automobile manufacturers slowly ebb away. That leaves them with little left to stand on. Neither Function nor Price will save them. Convenience has been their major strong point, but they are losing that as their Reliability slips.
You might ask why Reliability has slipped. The companies made choices that reduced the quality of their automobiles. This is an example of a self-defeating cost reduction, which sinks many competitors in Hostile marketplaces. (See “Success Under Fire: Policies to Prosper in Hostile Times” in StrategyStreet.com.)
Monday, November 3, 2008
Standard Leader Expands in Tough Market and Uses Price
Kohl’s Corporation is opening forty-six stores soon as part of a plan to gain market share as the busy holiday season starts in the U.S. Today, Kohl’s has something less than 1,000 stores open in the U.S. The company expects sales at stores open for a year or more to be down 2 to 4% during this year’s holiday season compared to last, so they are opening stores to make up for some of the sales fall-off.
But that’s not all they are doing. The company is a middle market chain competing with the likes of Penney’s and Macys. The company plans to renovate sixty existing locations in 2009, twice the number it will renovate in 2008. Probably boldest of all is their plan to use low prices to gain share.
The company expects to advertise its lower prices in its holiday marketing early in the season to be sure that customers know their spending goes further at Kohl’s. This price thrust will work only if Penney’s and Macys do not follow Kohl’s lead. (See the Symptom & Implication, “Large competitors are maintaining price levels as smaller competitors discount”, on StrategyStreet.com.) If they don’t, they are in a Leader’s Trap. A Leader’s Trap occurs when an established industry competitor maintains a price umbrella and cedes share to a discounting competitor in the mistaken belief that customers will stay loyal to the established competitor by paying a premium for its product. Over time, the company in the Leader's Trap not only loses share, but also sees prices fall to a level near the price established by the discounting competitor. (See the Perspective, “The Leader’s Trap”, on StrategyStreet.com.)
Kohl’s is almost certain to gain market share at the expense of weaker competitors, such as Mervyn’s and some of the regional department store chains, who do not have the financial where-with-all to stay with them. But this market share is available to Penney’s and Macys, as well. If these latter two Standard Leaders don’t follow, they will be making a mistake.
But that’s not all they are doing. The company is a middle market chain competing with the likes of Penney’s and Macys. The company plans to renovate sixty existing locations in 2009, twice the number it will renovate in 2008. Probably boldest of all is their plan to use low prices to gain share.
The company expects to advertise its lower prices in its holiday marketing early in the season to be sure that customers know their spending goes further at Kohl’s. This price thrust will work only if Penney’s and Macys do not follow Kohl’s lead. (See the Symptom & Implication, “Large competitors are maintaining price levels as smaller competitors discount”, on StrategyStreet.com.) If they don’t, they are in a Leader’s Trap. A Leader’s Trap occurs when an established industry competitor maintains a price umbrella and cedes share to a discounting competitor in the mistaken belief that customers will stay loyal to the established competitor by paying a premium for its product. Over time, the company in the Leader's Trap not only loses share, but also sees prices fall to a level near the price established by the discounting competitor. (See the Perspective, “The Leader’s Trap”, on StrategyStreet.com.)
Kohl’s is almost certain to gain market share at the expense of weaker competitors, such as Mervyn’s and some of the regional department store chains, who do not have the financial where-with-all to stay with them. But this market share is available to Penney’s and Macys, as well. If these latter two Standard Leaders don’t follow, they will be making a mistake.
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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