by Adam Hartung | Aug 7, 2009 | Defend & Extend, Disruptions, Food and Drink, General, Leadership, Lock-in, Music, Openness, Television
"Pepsi Launches Own Music Label in China" is the BusinessWeek headline. Clearly, the Pepsi staff has some new ideas. Recently Pepsi's Chairperson, Ms. Nooyi, made a trip to China for 10 days. Apparently frustrated, she commented to the Wall Street Journal in July that she didn't see enough Disruptive thinking on the part of her folks in China. She indicated the market was robust, but it was different and would take a different approach. It now sounds like her China leadership got the message.
In addition to launching a music label, Pepsi is producing a "Battle of the Bands" show in China. It's almost like a reformatted page from the aggressive growth years of Starbucks. Instead of just expanding into a new geography (China) with the same old playbook (like the floundering WalMart), Pepsi is figuring out how to be a big success. And that may mean producing television, producing music and making people into stars. China's culture is unlike anything in the U.S. or Europe. So doing new and different things will be critical to success. When you see a business developing its own scenarios about the future, taking actions its competitors (Coke) are too hide-bound to try, acting Disruptively to compete and using White Space projects to test new ideas you simply have to be excited!
On the other hand, "Tide Turns 'Basic" for P&G in Slump" is the Wall Street Journal headline about the latest "new" product at P&G. Please remember, the departing P&G CEO was lauded for creating an innovative culture at P&G. But it appears the legacy is a culture of sustaining innovations intended to do nothing more than Defend & Extend the old P&G brands. Now slumping, P&G needs to identify market shifts more than ever, and create new solutions that help it move with market trends. Instead, the company is rushing into reverse! Management not only seem to be driving the bus looking in the rear-view mirror, but actually driving it that way as well!
Tide has been around a long time. Ostensibly a very good product. For reasons explained in the article, managers at P&G felt the best way to sell more product was to make it less good. Really. They removed some of the chemicals that help you get clothes clean, renamed it "Basic" and launched the product at a lower price. It's not "new and improved." It's not even "better." It's literally less good – but cheaper. Sort of like store brands, or private label – only maybe not as good? Doesn't that sort of obviate the whole notion of branding?
People don't ever like to go backward. We like to grow. To learn and get more out of life. When we find a product that works, why would we want a product that works less well? And the folks at P&G missed this. Only by being insanely internally focused, terribly Locked-in, can you think this is a good idea. Looking inside a person could say "well, we want to jam the shelves with more of our branded product. We want to have the word 'Tide' smeared everywhere we can. We think people so identify with 'Tide' that they'll take a worse product just to get the name brand. We're willing to create a less good product thinking that we will get sales simply because it's cheaper than the stuff people really want to buy." Seem a little mixed up to you?
When you want to grow you figure out new ways to Disrupt the marketplace. You develop new solutions, new entry points, new connections with shifting market trends. You figure out how to be the best at the right price. You don't try to give people less, and tell them they are cheap. And Pepsi clearly gets it. They are willing to expand into music recording and TV production. Stuff P&G did when it was really creative and innovative – after all, that's why we call daytime TV "soaps", because P&G produced them just to sell soap. Now we see Pepsi applying that kind of scenario planning and competitive obsession, along with White Space, to develop new market approaches. Unfortunately we can't say the same for P&G — clearly stuck on trying to cram more stuff with the word "Tide" on it through distribution.
by Adam Hartung | May 8, 2009 | Current Affairs, Defend & Extend, Disruptions, Food and Drink, General, Innovation, Leadership, Lock-in, Openness, Television, Web/Tech, Weblogs
Where the people go, advertisers will follow. Why pay for an ad at the end of a never traveled dead-end street? The purpose of advertising is to reach people with your message. And now "Forrester: Interactive Marketing to grow 11% to $25.6 Billion in 2009" reports MediaPost.com. When print advertising is dropping (direct mail down 40%, newspaper down 35% and magazines down 28%), the on-line market is growing and expected to reach over $50billion by 2014. Search ads is the biggest, with over half the market, but social media is expected to grow the fastest at over 34%/year.
Such a market shift indicates that those who buy ads need to be very savvy about what works. Like I said, you don't want to be the fool who jumps into billboards, only to get placed on the one at the end of a dead-end road. Success means Disrupting your assumptions about advertising, and learning what work by entering White Space with tests and measurements.
In "Mobile Marketing Won't Work Here" Bret Berhoft explains why GenY simply won't tolerate intrusive ads – especially on their mobile devices. Social media are different conduits, with different users and different behaviors. Where older folks (and our parents) were content to be interrupted by ads – such as on TV – the avid users of new media aren't. And they've been known to create counter-movements attacking advertisers that don't adhere to their on-line behavior requirements.
What won't work is trying to do what Sears has done. Instead of learning how people use social media, and how you can connect with them to meet their needs, "Sears to Launch Social Networking Sites" we learn. Where everybody is using Facebook, MySpace, Twitter, Linked-in, etc., Sears decided to open two new sites called MySears.com and MyKmart.com. They hope people will go to these sites, register, and tell stories about their experiences in both retail chains. Then Sears intends to flow through good comments to Sears.com and KMart.com sites.
The horribly Locked-in Sears management keeps trying to Defend & Extend its outdated model. As people have left Sears and KMart in droves for competitors, they aren't looking for a site to "connect" with other people who are Sears centric. People use social networks to learn, grow, exchange ideas, keep up with trends. They don't register for a site because their parents used to shop there.
Sears has missed the basics of Disrupting its old Success Formula, so it keeps trying to apply it in ways that don't work. It keeps doing what it always did, only trying to do it in new places. These sites aren't White Space projects trying to participate in the social networks that are growing (like everything from illness questions to home how-tos). Rather, they are still trying to take the position that Sears is at the center of the world, and people want to be part of Sears.
Exactly how advertisers will capture the attention of participants still isn't clear. Some ideas have gone "viral" producing mega-returns for minimal investments. Other ideas have flopped despite big spending. The market is shifting, and variables keep changing (Marketers Search for Social Media Metric.) But for those who Disrupt their old Lock-ins, those who attack their assumptions, they can use White Space to learn what does work.
"Pizza Hut 'Twintern' to Guide Twitter Presence" is a great example of creating White Space to study social media advertising by participating. The new position will interact with Twitter users, and be a leader in how to interact with Facebook and other sites – even the notorious YouTube! where user content can include the very bizarre. By participating where the customers are, these leaders can develop insights to how you can consistently advertise effectively. Already Sony and Dell have demonstrated they can achieve high recall (Word of Mouth goes Far Beyond Social Media) beyond Social Media with their on-line efforts. These participants, who Disrupt their assumptions and bring in others to work in White Space will be the winners because they aren't trying to Defend & Extend the old Success Formula. They are trying to create a new one to which they can migrate the old business.
by Adam Hartung | Apr 26, 2009 | Books, Current Affairs, Food and Drink, Games, General, In the Rapids, Innovation, Leadership, Openness, Sports, Television
I recently listened to a great presentation on innovation by Bill Burnett, partner at Launchpad Partners. I recommend you download the slides to his presentation, "The CEO's Role in Innovation," in order to understand just how important innovation is to profitability as well as the CEOs role in creating the right culture. I also hand it to Bill that he not only lays out the CEO's role, but discusses what it takes organizationally to implement innovation – including getting the right people involved to go beyond just coming up with good ideas.
Markets shift. Sometimes there are long periods in which the market is reasonably the same (like newspapers). And sometimes it seems like new changes are happening rapidly (like computers). How long between shifts is impossible to predict. But it is certain that all markets shift. Some new technology, or a new form of solution, or a new way of pricing, or a new competitor will enter the market and change things such that the profitability of previous solutions declines. And it is the role of CEOs to create an open culture in which the management team feels it must keep its eyes peeled for market shifts, bring them to the company for discussion, and propose innovations which can increase the longevity of company sales and profits by addressing the market shifts.
Take for example the current shift in the sports market. This is important, because a throng of businesses advertise in the sports market. Everything from TV or radio ads during games, to ads inside event brochures, to putting logos on equipment and uniforms, to paying athletes as endorsers. Being aligned with the right sports, the right teams and the right athletes is worth a lot of money. You can legitimately ask, would Nike be Nike if they hadn't been the first company to sign up Michael Jordan – and later Tiger Woods? So the money is very large (billions of dollars) making mistakes very expensive. But getting it right can be worth billions in returns.
So catching a recent MediaPost.com blog "The Allure of Action Sports" is important. While most of us think of basketball, baseball, American football and possibly NASCAR – for GEN Y (young folks) sports is taking on an entirely new meaning. These are sports with almost no rules – just technique. They pack the stands at events such as the Dew Tour and X Games. Active participants include almost 12 million skateboarders, 7 million snowboarders and 3 million BMX riders. Not only do people watch these sports, but the most popular performers have their own cable TV shows – like "Viva La Bam." Just like football and basketball overtook our fathers' love of baseball as America's pastime – young competitors are shifting to watch and practice action sports. For people in consumer goods and many retailers, it becomes critical that the CEO provide an environment where the company can Disrupt its old marketing practices and create White Space to explore how to link with these new markets. The winners will rake in millions of higher profits. The laggards will see the value of their sports market spending decline.
Have you recognized this shift in the sports market? Are you prepared to take advantage of this shift? Are you considering sponsoring a local skateboard competition – for example – to promote a restaurant, quick stop, or T-Shirt store? You can react faster than Wal-Mart, Coke or GM – are you considering the options to grab loyal customers when they are still "McDonald's targets"?
A great example of the right kind of CEO has been Jeff Bezos of Amazon. As I reported in this blog back in January, book sales declined about 10% in 2008. You would think this would spell a huge problem for the world's largest bookseller. But SeattlePI.com recently reported "Amazon Profits Jump Despite Recession." CEO Bezos recognized long ago that book readership was jeapardized by changing lifestyles. Fewer people have the willingness to buy printed books, carry them around and take time to read them. So he Disrupted his retail Success Formula and implemented White Space to develop something new. This led to Kindle, a product which is small, light, can hold hundreds of books, can be read "on the go", accepts downloads of journals (magazines and newspapers) and can even read the book to you (Kindle has an audio feature.) And that's just product rev 2 – who knows where this will be in 3 years. By focusing on the future he could see the market for reading shifting – and he created an environment in which new innovation could be developed to keep Amazon growing even when the traditional products (and business) started declining. Kindle is now outselling everyone's expectations.
Innovation is the lifeblood of businesses. Without innovation Defend & Extend management leads to declining returns as competitors create market shifts. So it is crucial leaders, from managers to the CEO, keep their eyes on the future to spot market challenges and obsess about competitor actions that are changing market requirements. Then be willing to Disrupt the old Success Formula by attacking Lock-ins, and use White Space to test and implement new innovations which can lead to a new Success Formula keeping the business evergreen.
by Adam Hartung | Apr 20, 2009 | Current Affairs, Food and Drink, General, In the Rapids, Leadership, Openness
"PepsiCo bids to buy its bottlers for $6billion," is the Marketwatch headline today. Another big Disruption, this time at the industry level, orchestrated by PepsiCo's Chairperson/CEO Indra Nooyi. Now that changes are being made with the product line, packaging and brands this latest move will allow Pepsi's beverage division to much more quickly implement changes to align with market needs. While Coke is doing little, Pepsi is disrupting the industry organization changing the marketplace and placing serious challenges onto all competitors. And without waiting for the recession to end.
Many leadership teams should pay close attention to what's going on at PepsiCo. By moving fast to align with future market needs they are catching competitors unwilling to take action due to recessionary concerns. Their Disruptions are creating changes that will help Pepsi return to the "muscle building" organization created in the days of former Chairman Andrall Pearson. And the changes coming out of White Space are helping Pepsi to develop a stronger Success Formula for competing in the post-industrial age.
Investors, employees and vendors should be encouraged by Pepsi. Competitors had better be worried. And all leadership teams can learn from the action being taken to gain share during this period of uncertainty. As companies hit growth stalls the tendency is to "wait and see". But winners react quickly to Disrupt and use White Space where they overtake delaying competitors – returning to the Rapids of growth and gaining share.
by Adam Hartung | Apr 16, 2009 | Current Affairs, Defend & Extend, Food and Drink, General, In the Swamp, In the Whirlpool, Leadership, Lock-in
All of America may have learned the jingle "America spells cheese K*R*A*F*T", but that doesn't mean Kraft is a good investment. When the recession first began, investors were excited about buying companies that had well known brands – especially in food. The idea was that everyone has to eat, so food companies won't get hammered like an industrial company (think Caterpillar or General Electric) when the economy shrinks. Second, people will eat out less and in more so food might actually see an uptick in growth. Third, people will want well known brands because it well help them feel good during the depressing downturn. So, Kraft was to be a good, safe investment. After all, even though it's only been spun out of cigarrette company Altria a few months, this thinking was powerful enough for the Dow editors to replace failed AIG with Kraft on the (in)famous Dow Jones Industrial Average.
Too bad things didn't work out that way (see chart here). Although the stock held up through the summer near it's spin-out high at 35, Kraft's value fell out of the proverbial bed since then. Down about 40%. What's worse, as several companies have "bounced back" during the recent stock market rebound Kraft shares have gone nowhere. And now Crain's Chicago Business reports "Analyst downgrades Kraft on volume risk." This UBS analyst has noted that instead of going up, or sideways, sales (and volume) at Kraft have declined. While he might have expected a potential 1% decline, instead he's seeing drops of more like 2.5%. In light of this poor performance, he thinks the best Kraft can do for the next 12 months is a meager improvement – or more likely sideways performance.
Kraft has been in a growth stall for a long time. Since well before spinning out of Altria. The company stopped launching new products years ago. Instead, it has been trying to increase sales with line extensions of its existing products – things like 100 calorie packs of Oreos. There hasn't been a real new product at Kraft since DiGiorno pizza and Boboli crust some 10 years ago. Simultaneously, the company sold some of its high growth businesses, like Altoids, in order to "focus on core brands". All of which meant that while cash flow has been stable, there's been no growth. Turns out folks may be eating at home more, but they aren't paying up for worn-out brands like Velveeta, instead turning to store brands and generics. Shoppers are looking for new things to improve their meals during this recession – but Kraft simply doesn't have any.
Without innovation, Kraft has gone nowhere. For a decade the company has merely Defended & Extended its 1940s business model. It keeps trying to do more of the same, perhaps faster and better. It couldn't do cheaper because of rising commodity prices last year, so it actually raised prices. As a result, customers are quite happy to buy comparable, but cheaper, products setting Kraft up for price wars in almost all its product lines. And there's nothing Kraft can point to as a new product which will actually grow the top line. Just a hope in more advertising of its old products, doing more of the same.
When Kraft spun out the CEO was replaced in order for Kraft to revitalize its moribund organization. Good move. The previous CEO was so in love with D&E management that he bragged about his "strategy" of spending more on Velveeta and older brands – in other words he was wedded to the outdated Success Formula and had no plans to change it.
So he was replaced by a competent executive named Irene Rosenfeld. This was touted as a big move, by bringing in the Chairman of PepsiCo's Frito-Lay Division. PepsiCo is noted for its fairly Disruptive environment, instituted during the reign of Chairman Andrall Pearson who aggressively moved people around (and out) in his effort to "muscle build" the organization. But reality was that Dr. Rosenfeld had worked at Kraft for many years before going to PepsiCo, and was returning (according to her bio on the Kraft web site). And her leadership has been, well, more of the same. There have been no Disruptions at Kraft – no White Space – and no new products. So the growth stall that began during the Altria ownership has continued unabated.
Despite Kraft's lack of performance – and you could say poor performance given that sales and volume are down, as well as profits since she took the top job – Dr. Rosenfeld's salary was increased at the end of March (according to Marketwatch.com "Compensation rose for Kraft Foods' CEO in 2008"). It seems the Board of Directors was concerned that the stock options she was awarded in early February had fallen in value (because the share price dropped dramatically – hurting all investors) so they felt they had to raise her base pay. Since the "at risk" pay didn't pan out, well they felt compelled to make her compensation less risky. Then they invented some excuses to make themselves feel better, like they want the CEO to be paid comparably with other CEOs.
(I guess they don't care about the 20 other senior execs who have seen their base pay frozen. Say, do you suppose I could appeal to my publisher that I want pay like other authors? Like Barack Obama who got almost $3million in royalties last year? Or do you suppose the publisher might tell me if I want that much money I should sell more books – looking at my results to determine how much I should get? I rather like this "comparable pay" idea – sounds sort of like union language for CEO contracts.)
Kraft is going nowhere, and Dr. Rosenfeld is the wrong person in the Chairman/CEO job. Kraft is stalled, and investors as well as employees are suffering. Kraft desperately needs leaders that will Disrupt the organization, refocus it externally on market needs, become obsessive about improving versus competitors in base businesses while identifying fringe competitors changing the market landscape. And above all introduce some White Space where Kraft can innovate new products and services that will get the company growing again! Kraft has enormous resources, but the company is frittering them away Defending & Extending a 60+ year old Success Formula that has no growth left in it. More than ever in Kraft's long history, the company needs to overcome it's Lock-in to innovate – and the Board needs to realize that requires a change in leadership.
by Adam Hartung | Mar 19, 2009 | Current Affairs, Defend & Extend, Food and Drink, In the Swamp, In the Whirlpool, Leadership, Lock-in
"Nobody doesn't like Sara Lee." That was the jingle I still remember from my youth. For years we heard this on the TV, as we were coaxed to buy the delictable productss, frozen, refrigerated and fresh, offered by Sara Lee. But today, unfortunately, almost nobody likes Sara Lee anymore. Oh – the products are great – it's the company, primarily its leadership, that's a disaster.
It's tough to make money on food. After all, everyone has the same cost for the ingredients. And in the developed world, there's more than enough food to go around. For the last 50 years, to make money on food required adding to the product so it had more value. Such as freezing frozen potatoe slices rather than selling whole potatoes so french fries are more convenient - raising price and margin. Or adding preservatives and vitamins so the bread lasts longer than the other guy's, and may be a touch better for you. Or the biggest addition, advertising so you imbue the food with all kinds of personality elements urging customers to identify with the product. If you want to make money selling food, you have to taste better, prepare faster, sell cheaper and hopefully give me more value in myself — or else I'll by the generic product and kill your margin. And for a number of years, Sara Lee knew how to do this fairly well.
But then, Sara Lee stumbled. It quit launching new products and new brands. It's quality and branding was matched by competitors from Entenmann's to Little Debbie. Without innovation, the frozen, refrigerated and fresh pies, sausage and other products saw margins shrink. So Sara Lee hired a bright exec from PepsiCo to fix up the company named Brenda Barnes. Since then, the story has really gone downhill.
Ms. Barnes focused on her "problem," a low stock price, rather the market challenges Sara Lee faced. She built a 5 year plan to turn around Sara Lee. But his plan had no innovation involved. No plans for growth. Just the opposite, she intended to sell many assets to raise cash. And then use that cash to buy shares. And through this process, she would "prop up" the company stock to the benefit of shareholders. The company would be smaller – but she said it would be worth more – in some kind of weird economics. But, this stock ploy had worked for other industrial companies, she said, so it would work for Sara Lee. Since then, according to the chart at Marketwatch.com, Sara Lee stock has gone from 21 to 7! While the CEO wants to blame the tough economy for her performance, the chart shows that this "strategy" has been a dead loser since the day it was announced. Things have been downhill since long before banks trimmed their lending.
Now, in her latest move, the CEO wants to sell some more businesses. But in an FT.com article "Sara Lee Searches for Sell-off Suitor" there aren't any buyers for remaining businesses. As one analyst commented "it's a rather tired portfolio." That's a polite way of saying "when you don't innovate your business, why would someone want to buy it?" As another analyst said "it's not a very good business." Increasingly, instead of buying these product lines competitors realize they would prefer to compete against them, growing sales organically and profitably — without the headaches and cost of acquisition.
So, because the sale side of the strategy isn't working, we read in Crains ChicagoBusiness.com "Sara Lee to put stock repurchases on hold." After buying shares at $20, $18, $15, the CEO has decided not to buy shares when they are $7 – in order to conserve cash! Maybe if she had spent money on growing the business, expanding products and new business lines, using White Space to innovate new profitable opportunities the stock wouldn't be down to $7 with little interest on the part of any buyers.
Ms. Barnes tried to implement an industrial strategy when it can no longer work. Sara Lee brands aren't some kind of asset that will always go up in value. You can't just expect sales and profits to rise because you do more of the same, and cut costs. The world is highly competitive, and you have to prove the value of your business every day. Customers are demanding, and competitors are ready to steal them away in a heartbeat. You can't prop up the stock by trying to reduce the number of shares, unless you're ready to get down to $1 of revenue and 1 share left valued at $1. What good is that?
Sara Lee could have behaved very differently in 2005 – and CAN behave very differently now. The company clearly needs a new CEO that is ready to develop scenarios of the future which indicate what innovations could have high value. Instead of talking about what Sara Lee used to be, the CEO and management team needs to define what Sara Lee will be in 2015. And by obsessing about competitors, describe how Sara Lee can be a big winner. Then there needs to be Disruption in order to allow the company to consider the new business opportunities, and White Space with permission and resources to rebuild the Success Formula into one that can make above-average rates of return and grow! If Sara Lee will take these actions the company still has time to meet market challenges. But if it doesn't act fast, after 4 years of decline and a very shifted market, nobody's going to have any Sara Lee to nibble on sooner than Ms. Barnes is admitting.
by Adam Hartung | Feb 24, 2009 | Defend & Extend, Food and Drink, Innovation
Hats off to anybody launching growth projects in this economy. With all the layoffs and other cost cutting, there are far too few companies looking for the opportunities these market shifts are creating. So it's exciting to hear that Panera Bread is testing catering at its 80 Chicago locations (read article here). But we have to wonder, will this generate incremental growth and profits?
The market view is that businesses are doing less dining out for breakfast and lunch meetings. To keep costs down, they would prefer catering food into the office. On the face of this, it's not a bad idea. But of course, lots of people are having this idea today. So Panera is not unique to begin thinking this way. Perhaps we can use The Phoenix Principle to improve our odds of predicting the outcome accurately.
Firstly, Panera is a restaurant. Caterers are not restaurants. If you look at successful caterers you will see they are experts at preparing food in special ways so it is finished, freshly, at the destination. In addition to unique cooking approaches, to make sure food is not prepared too early and becomes unpalatable, they have unique equipment to transport the food in various stages of preparation. And unique equipment to finish the dishes at the location. And their employees are uniquely trained to make sure the on-site meal is the quality desired.
The catering business is not an underserved market, simply waiting for Panera to enter. So, when Panera says it is going to use its 80 area stores to test a higher focus on catering – the odds are it won't work. Becoming a caterer would be a serious disruption to any restaurant business, and to pull it off would require implementing an entirely new operation from which to launch tests – not something run out of the back of the restaurant. We can safely predict that Panera will not become a strong force in catering.
What Panera is much more likely to rapidly evolve to is not something as disruptive as catering. Instead, they will quickly start trying to extend the existing restaurant Success Formula into delivery. Here they will try to make small changes to the products, enhance packaging somewhat, and perhaps add some sort of delivery service. They may well put in place special pricing for delivered orders, and even set up special operations for ordering and scheduling delivery. Thus the activity will be an effort to Defend & Extend the existing Panera restaurant by implementing a sustaining innovation without really disrupting their Lock-ins.
So, will this work? Look again to The Phoenix Principle. The company has seen a new opportunity in the market. That is good. But have they obsessed about competition? Many other restaurants deliver food – from pizza makers to Jimmy John's sandwich shoppes – including dozens of small chanis and thousands of independents restaurants/diners. Even the article quotes the Panera operations V.P. as saying that others such as Chipotle and Boston Market serve the target he's aiming toward. What will make Panera unique? Why will people want to buy Panera? The market is pretty well served. For Panera to succeed they will have to do something MORE than the competition. As a D&E action, they have to somehow be BETTER, FASTER, or CHEAPER.
The Crain's article referenced earlier is precious short on any discussion of competition or value proposition. And the interview didn't give any indication that the company had developed a really powerful competitive message – as much as they had merely identified an opportunity. Without obsessing about competitors, the odds are very small that the project will make much difference.
The Phoenix Principle would predict that this project by Panera will hit the market with a lot of advertising and promotion. But the company will probably under-excite customers, because they aren't really catering as much as delivering (like the named competitors.) When delivering, without a powerful competitive position (MORE, BETTER, FASTER, CHEAPER) we can expect there will be early price offers to incent trial – but then Panera will find this is a very tough business to succeed in. Panera's leaders will likely obsess about execution – but they are facing some competitors that already are pretty good at execution, and have a lot of experience to back up their practices. The odds are high that the cost to then experiment, in order to become competitive, after already spending money on the launch, will seem pretty high – and the whole thing will go into a slow, delayed analysis. Odds of succeeding in a year – about 20%.
I applaud the company for seeking out new markets. But if you're an investor, wait until you see whether they truly intend to Disrupt opeations to enter catering – or if they go into this as a Defend & Extend action. When it becomes the latter, you should expect the cost will not be well repaid, because their ability to beat the competition – which will remain fierce, and reactive to the Panera launch – will not be strong. Thus, not likely to drive much incremental revenue and probably less incremental profit.
Anyone can have a great idea. But to be a successful innovation requires implementation. And Panera doesn't look like they've figured out how critical it is to obsess about competitors BEFORE entering tough markets. Chicago has all the earmarks of an expensive test – where the company may declare victory but which isn't likely to do much for investors, employees or vendors.
by Adam Hartung | Feb 9, 2009 | Current Affairs, Food and Drink, In the Swamp, Leadership
The second step in following The Phoenix Principle to achieve superior returns is to study competitors. Better, obsess about them. Why? So you can learn from them and position your products, services and skill sets in a way to be a leader. We would hope that studying competitors would not lead a company to take on battles it's almost assured of not winning. Too bad nobody told that to Mr. Schultz at Starbucks, who seems intent on killing Starbucks since his return as CEO.
Starbucks become an icon by offering coffee shops where people could meet, talk and share a coffee – while possibly reading, or checking their email. One of the most famous situation comedies of recent past was "Friends", a show in which people regularly met in a coffee shop not unlike Starbucks. People could order a wide range of different coffee drinks, and the ambience was intended to reflect a more European environment for meeting to drink and discuss. This combination of product and service found mass appeal, and rapid growth. Meanwhile, the previous CEO rapidly moved to seize the value of this appeal by stretching the brand into grocery store sales, coffee on airlines, liquor products, music sales, various retail items, some food (prepared sandwiches and high-end snacks, mostly), artist representation and even movie making. He knew there was a limit to store expansion, and he kept opening White Space to find new business opportunities.
But then Mr. Schultz, considered the "founding CEO" (even though he wasn't the founder) came roaring back – firing the previous expansion-oriented CEO. He claimed these expansion opportunities caused Starbucks to "lose focus". So he quickly set to work cutting back offerings. This led to layoffs. Which led to closing stores. Which led to more layoffs. The company fast went into a tailspin while he "refocused."
Meanwhile competitors started having a field day. Dunkin Donuts launched a campaign lampooning the drink options and the special language of Starbucks, appealing for old customers to return for a donut – and get a latte too. And McDonald's, after years of study, finally decided to roll out a company-wide "McCafe" in which McDonald's could offer specialty coffee drinks as well. While Starbuck's CEO was rolling backward, competitors were rolling forward – and in the case of McDonald's rolling like a Panzer tank.
Now, with a big recession in force, McDonald's is making hay by siezing on its long-held position as a low cost place. Like Wal-Mart, McDonald's is in the right place for people who want to seek out brands that represent "cheap." With sales up in this recession, the company is now launching a new program to highlight its McCafe concept directly aimed at trying to steal Starbucks customers (readarticle here).
So, here's Starbucks that has "repositioned" itself back as strictly a "coffee company". And the company has been spiraling downward for over a year. And the world's largest restaurant company has its sites set right on you. What should you do? Starbucks has decided to launch a "value meal" (read article here). Starbucks is going to go head-to-head with McDonald's. Uh, talk about walking in front of a truck.
Far too often company leadership thinks the right thing to do is "focus, focus, focus" then define battles with competitors and enter into a gladiator style war to the death. And that is just plain foolish. Why would anyone take on a fight with Goliath if you can avoid it? At the very least, shouldn't you study competitors so you compete with them in ways they can't? You wouldn't choose to go toe-to-toe when you can redefine competition to your benefit.
But that is exactly what Starbuck's has done. Starbucks spent its longevity building a brand that stood for being somewhat "upmarket." You may not be able to afford a Porsche, but you could afford a good coffee in a great environment. Sure, you might cut back when the purse is slim, but you still know where the place is that gave you the great, good-inside feeling you always got when buying their product or visiting their store. Now the CEO of that company has taken to comparing the product, and the stores, to the place where kids are jumping around in the play pit – and you can smell $1.00 hamburgers cooking in the background. He's decided to offer values which compare his store, where you remember the cozy stuffed chairs and the sounds of light jazz and the smell of chocolate – with the place where you sit in plastic, unmovable benches at plastic, unmovable tables while listening to canned music bouncing off the tile (or porcelain) walls where you can wipe down everything with a mop.
You study competitors so you can be fleet-of-foot. You want to avoid the bloody battles, and learn where you can use strengths to win. Instead, Starbucks' CEO is doing the opposite. He has chosen to go head-to-head in a battle that can only serve to worsen the impression of his business among virtually all customers, while tacitly acknowledging that a far more successful (at this time) and better financed competitor is coming into his market. His desire to Defend his old business is causing him to take actions that are sure to diminish its value.
Let's see, does this possibly remind you of — let's see — maybe Marc Andreeson's decision to have Netscape go head-to-head with Microsoft selling internet browsers? How'd that work out for him? His investors? His employees? His vendors?
Studying competitors is incredibly important. It can help you to avoid bone-crushing competition. It can identify new ways to compete that leads to advantage. It can help you maneuver around better funded competitors so you can win – like Domino's building a successful pizza business by focusing on delivery while Pizza Hut focused on its eat-in pizzerias. But you have to be smart enough to realize not to try going headlong into battle with competitors that can crush you.
