Origin of Brands, Part 3

Terrific discussion on the previous post about various branding strategies of McDonald's versus In-N-Out. Then Yvonne changed the subject and I wanted to post her comment here for further discussion. She says:

Let's talk about Amazon.com, Yahoo! and Google and how they've become branded in such a short time. Can you guestimate how far their brand reaches and how long they will continue to dominate the market in their area? Last year, Google was the #1 recognized brand worldwide...so my research showed... above Coke and McDonald's. I'm a new millennium business; I'd like more information on how to brand using the tools available to me today...and the Internet is a big one. Especially, blogging. Can someone speak to that issue, please?

On the subject of Google, Al responded:

Yahoo! was the first Internet search engine, but they lost their leadership to Google by branching out into many different categories (a mistake that Google is currently making.)

Hmm... is Google making a mistake in branching out? Or thinking about the question another way, are they really branching out? I don't think so. Every good brand is the clear answer to a question in a customer's mind. Google built its brand by answering the question, How can I find information online? Now with its searchable gmail and searchable desktop products, Google is now positioned to answer the question, How can I find information? They've done a great job extending the brand by broadening, not changing, the problem/solution equation.

My 2 cents... Al or Laura, do you have a comment for this?

Origin of Brands tour, continued

Continuing our conversation with Laura Ries on her new book, Origin of Brands:

Jennifer asks: You make the point that a brand is designed to fill a hole in the mind, and that brands cannot be successfully transferred to other products or categories. Yet I believe that good brands often grow on 2 different trees or branches; one is defined by the category and the other by the target audience or lifestyle. You say that McDonald's is defined by the category (hamburgers), yet it is also defined by a target audience (restaurant for kids). If you can associate a brand with multiple branches, you stand a good chance of evolving the brand and successfully expanding it to fit other products. McDonald's, for example, can expand from hamburgers effectively IF (and only if) their new offerings fit on the "restaurant for kids" branch. Nike is not confined by the "athletic shoe" branch as it has also defined itself on an aspirational 'athlete' branch, so it has been successful in launching other products under the Nike brand (we'll see about the golf clubs). You say in the book that the Cayenne is the first step in the downfall of Porsche, yet I see it as a successful venture because the Cayenne is designed for the same upscale performance-minded buyer; it doesn't fit on the 'sports car' branch, but it does fit on the corollary high-performance lifestyle branch. The VW Phaeton failed because it didn't fit on the VW 'for the people' branch; the VW Touareg succeeded because it did (despite the spelling of the name). IBM successfully extended its brand from computers to tech services by leveraging its position on the "trusted" technology branch. I'd enjoy your comments and responses on this subject.

Laura responds: There are two issues involved here:

(1) Would the companies you mentioned have been even more successful if they didn’t try to associate the brand with multiple branches?

(2) Were the competitors to these companies asleep at the switch which allowed these companies to line extend the brands?

Take one example. Both McDonald’s and In-N-Out Burger started in California. Both were originally focused on hamburgers, fries and drinks. Nothing else.

Today the average McDonald’s does slightly more than $1.5 million in annual sales while the average In-N-Out Burger unit does $1.9 million.

Which brand has the better strategy? We say In-N-Out Burger does because they still sell only hamburgers, fries and drinks and out-sell McDonald’s.

Both companies made mistakes. McDonald’s by expanding their menu. And In-N-Out Burger by not expanding their geography.

Jennifer asks: There’s a recent article in Reveries Cool News about McDonalds turning around their business through line extensions. I looked up their stock trend and, in fact, it’s more than doubled in the last two years as they’ve moved away from both burgers AND kids. I'd enjoy your thoughts on how that’s happened… because I agree with you; I have no idea what McD’s stands for anymore.

Laura responds: McDonald’s sales are up, but so is Burger King’s. The question is why. My feeling is that McDonald’s has greatly improved operations and that the line extensions have had little to do with its recent successes.

I think you’ll also find that the improvements are likely to be temporary in nature.

Questions & comments welcome!

Origin of Brands tour

Welcome to Day 7 of the Origin of Brands book tour! We've been talking with Laura Ries about this book that she co-authored with her father, Al Ries. On the first stop of the tour at 800-CEO-READ, Laura outlines the premise of the book:

Over the years, one of our key branding concepts has been “Create a new category you can be first in.” For example, Red Bull was the first energy drink. Starbucks, the first high-end coffee shop. BlackBerry, the first wireless email.

For at least a dozen years, however, the business media have been filled with stories about “convergence.” Categories would be coming together. Television with computers, for example. Companies, especially in the high-tech industries were spending billions of dollars trying to accomplish this with very little success.

In studying history, we found that the opposite was true. Categories did not converge; they diverged. The mainframe computer, for example did not converge with any other category. It diverged, creating endless opportunities to build new brands. Apple, Dell, Compaq, Microsoft, Intel, etc.

Jennifer asks: Although John Porcaro already asked questions about Microsoft during his stop on the book tour, I do have a related question: You say that you see Microsoft becoming the world's most valuable brand, and yet they are violating every principle of divergence. By fighting the divergence trend and keeping a death grip on a converged bundle of products, they are trying to win a many-front battle with a single overstretched brand. I wrote a blog post on this (here and here) and would love your comments.

Laura says: Not only did I find your blog astute and very interesting, I also agree with everything you said.

In general, any company that has 95 percent of a market should be asking themselves, did we accomplish this because our product is better or did we accomplish this because of the advantages conferred to a monopoly.

My feeling is that much of Microsoft’s success is due to their monopoly position. Everybody uses Windows because everybody uses Windows.

I think Microsoft would be better off if they introduced a second brand of operating system that would be the opposite of Windows. In other words, a much simpler system for users who find the current Microsoft products far too complicated.

Jennifer asks: What was your rationale for them becoming the world’s most valuable brand, despite their violation of divergence principles? Just monopoly status?

Laura responds: Microsoft is two companies. One is a very powerful personal computer software company, a company built on divergence, a company that has the lion’s share of the market.

(Nothing in marketing works better than dominating a market.)

The other Microsoft is built on convergence. The other Microsoft, by the way, loses money.

Microsoft would be a stronger, more powerful, more profitable company if it concentrated its resources on personal computer software. As a start, they should introduce a second brand of personal computer software. Cheaper, simpler, easier to use.

What do you think? Comments and questions for Laura are welcome!

Origin of Brands book tour

I'm excited to be one of the stops on the Origin of Brands book tour with Al and Laura Ries. Here's the schedule (I'm late posting it due to recent out-of-town travels, but please visit the first few blogs for some good stuff!)

* October 11th - 800-CEO-READ
* October 12th - John Porcaro
* October 13th- David Paull - Dial.Log
* October 14th - BusinessPundit
* October 15th - CrossRoads Dispatches
* October 18th - Learned on Women
* October 19th - What's Your Brand Mantra
* October 20th - WonderBranding

More on Bundling

(Updated) Re: my last post on Microsoft and bundling…
I wanted to respond to an email I received stating that the bulk of consumers want everything in one unified package, and that operationally it’s difficult to support both bundles and discrete items. To answer, I’ll make a correlation to my experience with the telecom industry:

1. If a company is the only one to provide a selection of related products or services, customers will prefer to buy them as a bundle. They’re going to buy the pieces anyway; it might as well be convenient. This was the case when telecom was regulated; if you were in GTE territory, you bought all their services because there wasn’t a choice. Similarly, Microsoft has had a monopoly over the PC software industry; with no competitive options, customers and retailers would naturally prefer bundles.

2. As the industry starts to mature and competitors arise to attack the market leader, some customers will seek out alternatives to various elements of the bundle. The number of customers defecting is based on satisfaction with the market leader’s product compared to the newcomers’ products. In GTE’s case, post-deregulation saw a mass exodus of customers because of strong dissatisfaction. In Microsoft’s case, people are generally pleased with the software and, at this point, the competition still isn’t advanced enough to provide most people with a real alternative. If customers are satisfied, then the company benefits from inertia.

3. As the industry matures and competitive products become more like the market leaders’ at a lower cost, commoditization starts to occur. At this point, consumers have real, viable choices; early adopters from stage 2 actively promote the new choices if they meet customer expectations. In the telecom industry, a lot of customers were burned by poor service from the alternative carriers and they went back to the market leader. In Microsoft’s case, if Linux, Mozilla, and any other new upstarts meet customer expectations at a cost of $0, then they’ll accelerate the commoditization of the software industry and spur more widespread defection from Microsoft. Also at this point, some percentage of the customer base still prefers bundles for convenience, but certainly not all. Telecom companies sell bundled services: local and LD is the most common and basic bundle, but they also try to add more products like DSL, web hosting, etc to the bundle. Yet customers either want stand-alone services, or highly tailored bundles in which they don't pay for what they don't use. And they can get exactly what they want because there are so many competitive options.

4. At this point, I think it’s interesting to look at the model provided by Clayton Christensen in The Innovator’s Solution. He observes that the market leader will continue to make incremental innovations to please the most demanding and highest revenue customers, while the market disruptors begin scooping up the customers who are overserved by the market leaders’ offerings. Microsoft’s offerings are incredibly advanced, huge, expensive programs that enable just about anything you might want to do… great for a large corporation, but overkill for most consumers. We’re not at stage 3 yet, and it might take a while due to inertia and the fact that Microsoft is the defacto standard… but for Microsoft to maintain its enormous market share, I believe it will need to offer unbundled (or re-bundled), less complicated and less expensive products that will effectively compete with the market disruptors. In other words, they need to disrupt their own business and begin competing on the basis of meeting customer needs instead of relying on bundling and distribution. In a similar vein, the telecom industry is faced with the disruptive technology of VoIP. I have a telecom client in Florida who recently launched a VoIP service for business that enables unlimited long-distance calls for a very low flat fee. This was an incredibly difficult decision because they lost a lot of revenue when their current long-distance customers switched over to their VoIP service. But it was a smart decision, because market disruptors like Vonage were already starting to steal customers with their free long-distance service. My client was forced to disrupt its own business model in order to retain customers and revenue as their business became commoditized.

On the operational issue… yes, I’m sure it’s a huge challenge. I don’t work there so I don’t know how to address that issue. All I can do is point out market dynamics, look at parallels with other industries, and come to some conclusions on where I think the market is headed. It’s a huge dilemma for Microsoft, and for any other company that has built its business on a bundle of integrated services. The second law of thermodynamics says that everything moves from unity to chaos, and I believe that companies ignore that law at their peril. Check out the Origin of Brands for more on this topic.

A call to unbundle

I recently wrote about how Microsoft should create loyalty by giving customers what they want instead of trying to trap them with monopolistic practices. And then I read this article on c/net: To secure IE, upgrade to XP.

Microsoft this week reiterated that it would keep the new version of Microsoft's IE Web browser available only as part of the recently released Windows XP operating system, Service Pack 2. The upgrade to XP from any previous Windows versions is $99 when ordered from Microsoft. Starting from scratch, the operating system costs $199.

That, analysts say, is a steep price to pay to secure a browser that swept the market as a free, standalone product.

"It's a problem that people should have to pay for a whole OS upgrade to get a safe browser," said Michael Cherry, analyst with Directions on Microsoft in Redmond, Wash. "It does look like a certain amount of this is to encourage upgrade to XP."

Of course, Microsoft denies that its goal is to get people to upgrade to XP. But since Longhorn has been delayed, it appears to be a good tactic from the corporate and investor perspectives to boost revenues for the OS division. But what about from the customer perspective? Why should I pay to upgrade to XP if I can get a free, safe browser from Mozilla or Opera? What happens if/when Google launches its own browser? (or even its own OS? Seehere and here)

Microsoft continues to rely on product bundling, a tactic that was very effective in the past when the market was less mature. But now customers have good alternatives to choose from. Some customers may want bundles for convenience, but others don't want all their eggs in one basket... especially not if they have to pay more for it. Sure, we could say that it's only early adopters that will choose to download Mozilla, and that surely it can't hurt Microsoft too badly. But where there are early adopters, others are sure to follow. When information and opinions travel so freely now over the 'net, adoption curves are shorter. More people find out about viable options faster. The overall trend is toward empowering customers through choice, not entrapping them into expensive, one-size-fits-all bundles that are often overkill for their needs. So they might make a couple billion from coercing some customers to upgrade for safety's sake... and create resentment among the remaining majority who will go in search of a lovable underdog to support. Me, I switched to Mozilla months ago. It's great.

Obviously I don’t work for Microsoft and I don’t know what the technical implications are of unbundling all their software. They originally created everything to work together, which was a smart strategy that got them where they are today. They’re in court right now arguing that there will be terrible problems unbundling Windows Media Player from Windows OS. Yet is unbundling really a technology challenge, or does it simply run counter to corporate philosophy? As SiliconValley.com comments:

In the past, Microsoft has argued that removing Media Player from Windows would harm the way the OS works. But RealNetworks proved the company wrong in 2003 when, at a closed door meeting of the European Commission, it showed an audience of more than 100 European competition regulators, opponents and Microsoft itself how easily Windows XP Embedded runs without the media player. I suspect that Microsoft will be proven wrong again if the court rules it must comply with the European Commission's order. Just as Real had little trouble tweaking XP to run without Windows Media Player, Microsoft will have little trouble tweaking its monopoly to run despite the commission's order.

I’m in the middle of reading The Origin of Brands by Al and Laura Reis, which supports my opinion that it’s time for Microsoft to start unbundling. Microsoft is swiming against the current toward divergence in the software sector. Instead of fighting to exist as the Swiss Army Knife of software (how many people do you know who actually USE a Swiss Army Knive?), Microsoft should seek to provide the best of each element: knife, scissors, toothpick… whatever the customer needs to accomplish the job at hand. Another great book along these lines is The Innovator’s Solution by Clayton Christensen, who talks about how customers “hire” specific products to accomplish certain jobs. He, along with Laura and Al Reis, berate the handheld industry for cramming too many solutions into one package.

By the way, I’m not advocating that bundling is always wrong. As Reis points out, many people want bundles for convenience. But it’s usually a smaller percentage of customers that want a bundle, and companies usually need to provide financial incentives to encourage customers to purchase more than one product from the company. So Microsoft (and any other company) should certainly keep its bundles -- or better yet, offer customized bundles with a discount –- but also offer each product independently for customers who want to take advantage of the many new choices becoming available within the territory. Otherwise you run the risk of losing customers entirely.