Friday, November 21, 2008

So You Want to Create a New Category!?

Over the course of my career, both inside of companies and as a consultant, I have come across many people who state that if you don't like the category you're in, then change the category. That has become somewhat of a marketing mantra. The problem is, it is wrong.

Categories exist in people's minds. There is a search engine category, a fast food category, a luxury goods category, etc. Categories are collections of companies meeting similar needs. Categories do not exist because someone has decided they should. Rather, they exist because the market has put them together. It is the market that determines if a category exists.

Let's look at a few examples: FaceBook was a new type of social networking site, but it joined the category of social networking sites with MySpace, YouTube, and others. It did not form a new category. It positioned itself as point of parity against its competitors--that is, like but better than others. It's value proposition was that it fulfilled a need and interest other sites did not. When Google came into the search engine market, it did not try to form a new category. One already existed called search engines. It too sought out a point of partity differentiation.

Recently, I heard a Wendy's commercial in which it says it is "way better than fast food". Really? There is a fast food category. What category is Wendy's in if it is not in the fast food category?

Al Ries, the brand expert, talks about "category before brand". People think category first and then seek the brand that defines the category.

It is possible to create a new category, but that can only happen when there is a disruptive technology that allows a company to change the entire way something is done. As Clay Christensen of Harvard Business School, the creator of the concept of disruptive change, notes, this type of change occurs when an industry is doing things in a certain way and then something comes along to change the way it is done. It can create a whole new category because it is so different. The Internet was such a disruptive technology. It helped to create whole new categories that never existed before.

Just because a company believes it may have a better value proposition than its competitors does not mean that it can create a new category, even if it does not like the category that already exists. Differentiation is important in brand and reputation, but differentiation does not mean a different category.

There is a brilliant article in the current issues of Corporate Reputation Review by King and Whetten who note that there is a difference but a link between what they call ligitimacy and reputation. Companies they note must first establish legitimacy within their industry group. Reputation is being distinguished from peers. It is a great concept. Similarly, brands must establish their legitimacy within their category and can enhance their equity when they are distinguished. But, it takes a whole new way of doing things to create a new category.

Thursday, November 20, 2008

A New Concept of CSR is Needed

The term Corporate Social Responsibility (CSR) is a catch phrase that means different things to different people. To some, it suggests philanthropy, to others is means getting involved in the community, to others it means sustainability (e.g., triple bottom line measurement of a company on its impact on society, economy and environment).

There are several things I dislike about the concept of CSR. First, it suggests that a company do something, anything to "benefit" society. This leads to all kinds of investments by companies in things that have little ROI to them or to the larger community. There is no strategy; it is purely a tactical attempt to be nice to someone in hopes that it will pay dividends or because the CEO has a special pet project. Second, it makes companies think that they can boost their reputation purely by doing something for the community. No company that I know of has built a reputation purely through CSR.

Now, let's understand that companies that want to be considered leaders are expected to be leaders in the larger society. They will be conspicuous by their absence. One cannot hide if one wants to be a leader. In fact, the concept of leadership mitigates against wanting to hide--one wants to lead, to be seen, to inspire and engage others.

I believe that CSR should be redefined as corporate social engagement (CSE). CSE is active; CSR can be passive. CSE is broader also. To become engaged, one needs to understand and respect the larger society and the pushes and pulls of various stakeholders. One negotiates and builds relationships rather than acting like a wealthy donor. Companies have adopted the concept of "noblesse oblige"; that those with wealth and social standing owe something to society. I believe that those who have been blessed with such good fortune should want to help society improve, but it depends how it is done.

CSE is a different concept. It means thinking about the issues of society that also involve the company and engaging in dialog and relationships to create something better "together". It means taking a systems approach and seeing the company as part of the larger social system.

Let's take an example. GM has given away a lot of money. Now, it is nearly broke and is cutting out both its CSR programs as well as some marketing activities like car shows and NASCAR sponsorships. If GM had a sense of CSE, it would never have allowed its CEO to travel to Washington to beg for money by flying in a private jet which was met on the tarmac by a private limo. The company would have understood that its relationship with society had changed and that it needed a new way of behaving. Some have suggested that this was a PR failure--they should not have allowed themselves to be seen as being this callous. I disagree. It was not a PR failure. It was a GM cultural failure. It is just one of the signs of what has gotten them into trouble in the first place. The management gets rich so they have to make the workers rich and they end up making cars that are too expensive for the market. They don't really engage in the outside world--they only study it through marketing research, so they continue to make Hummer's even though they know that oil prices will at some time go through the roof. Some people don't get it (read my blog about AIG, another company that cannot be educated.

Under the old concept, I'm sure that the folks at GM would say: "let us get rich again and we will give away large amounts of money like we used to". That's the wrong way to think. That's akin to steel companies making millions in Pittsburgh yet suffering through riots because of their poor employee treatment, yet getting praise for building libraries, museums and schools. That is the feudal prince approach, not an engagement.

Don't get me wrong, there are a lot of "little people" and their ranks are growing everyday in our current financial meltdown. Lots of people need help. It is times like this when companies say that they would love to do something but do not have the money for CSR. They may not, but they certainly have and have had the "sweat equity" of their expertise to help the larger community through engagement. There are many financial experts in large companies who could help non-profits and city government manage through difficult times--that kind of investment would be true engagement, would help tremendously, and be valued. It might not be as visible and it might be a longer-term activity, but it would start to get the company out of its insulated perspective and help it to become part of the larger society.

That's the point between CSR and CSE that is important. The concept I would like to see is for companies to consider themselves as part of the larger society--part of a system--rather than defining themselves as "us" and the rest of society as "them". A boss of mine early in my career cautioned me to not allow myself to get caught up in what he called the "convent mentality" of most companies. Within the convent, everyone has the same religion and the same spirit of love for "the one true God". Outside of the convent are all those who need to be saved because they do not have the "right religion". Too many companies have behaved this way. I believe in the Unitarian principles, that we are all seeking the same spritual path but in different ways that need to be respected, even if not understood. We have to find ways to engage if we are going to move along the path together, while still allowing each company to follow it own "spiritual path".

Monday, November 17, 2008

What to do with GM?

What a strange situation we face! GM is pressuring the government for a bail (hand) out. They want a minimum of $25 million on top of money they have already received to help them make it--for how long few know.

I cannot imagine GM surviving. This is a company that has been so poorly managed over the years that it likely should not survive. It is a dinosaur--a large one. The larger the dinosaur, the slower and more agonizing the death. But, dinosaurs die. The market, like life itself, ebbs and flows. Look back at the Dow Jones in 1970 or 1980. Many of those companies are no longer around. We all survived well.

GM has a scare tactic. The economic exponential of their failure would mean 2.5 million jobs. I don't doubt that number is right. GM failing would bring down most of their suppliers, the dealers, workers and others. They have a huge supply chain. It would all collapse.

But, people will still buy cars. It's not like there is nothing to replace GM. They are failing, in part, because people don't like what they make and also what they make cannot be made at a cost that can reasonably be passed on to the consumer.
If they fail, people will buy cars with names like Honda, Toyota, etc. Come to think of it, they already are. In just the past 10 years, the majority of cars sold in the Philadelphia area went from American made to foreign made. The percentage of non-Detroit cars bought keeps growing. Why? Because few people like what Detroit is making. The market has spoken.

Could GM have done better? Yes, it could have not given away the store to the unions. The average GM worker with wages, benefits and pension costs GM about $78. The average for the same worker at Toyota is about $45.

So what are we going to bail out? The company will fail eventually. It is too big to change quickly enough to save itself. The dye has been cast. The GM brand has become "untouchable".

Will we bail them out? We likely will. The bulk of the union workers live in states like Ohio, Indiana and Michigan, states that voted Democratic. This will be a political bail out, not a smart business bail out. President-Elect Obama is very smart and very politically savvy. He also knows that the country does not need any more bad news that could cause people to go from a recession mentality to a depression mentality, because he knows that economics is part perception and part financial.

This is a no win situation for everyone.

High Praise for Goldman Sachs Execs

In a recent blog, I chastized AIG management for not understanding the word "optics". The management team at the insurance giant seems to be incapable of understanding the world outside of their confines on Wall Street. They just don't get it.

Today, however, came word that the maanagement team at Goldman Sachs will not take their bonuses in 2008. This is a big deal! The decision effectively caps the salaries of the top team at Goldman at $600,000. While few people will cry for them, let's put in perspective that last year the CEO took home about $68 million.

Now, many would say that the execs don't deserve a bonus in the first place. That may be true. But, as we can see with AIG, there are many things that may not be deserved that people do not often understand. Bonuses have been awarded to countless executives whose companies have nearly tanked. Currently, Chrysler has on its books millions of dollars in promised "retainer bonuses" for its top team--given when DaimlerBenz divested itself of Chrysler to keep the top team in tact for a new owner. Why anyone wanted to retain this group of people who have mismanaged the company, I cannot figure out, but the bonuses are supposedly legally owed. This means that Chrysler could be in a position of asking the US for a hand-out with part of the money used to pay millions to its top executives. Outrageous! AIG is fighting the federal government on back taxes with--you guessed it--tax payer money. Perhaps it is time for the shareholders of AIG--US tax payers--to demand that all of the management team there be fired and the board be replaced. What else can one do when it seems impossible to change the behavior of a company?

So, with all of this going on, I think that we should all thank the top team at Goldman. They will now draw a line in the sand passed which few will want to cross. It will be interesting to see if anyone has the nerve to go in a different direction.

Saturday, November 15, 2008

Starbucks--Can an Expanded Brand be Contracted?

Starbucks began as a creation of Howard Schultz--a high-end coffee house in the European tradition. Flavors and armomas of coffee being ground, people lingering, a feeling of neighborhood. It was a life-style brand.

When Schultz stepped down as CEO, his successor changed the brand by expanding it. Food was brought into the stores; coffee was no longer ground. The customer base was expanded by "dumbing down" the original concept to appeal to a wider audience.

Schultz is back and has brought back with him his original chief marketing officer. The two want to recapture the Starbucks brand that they first created. However, the question is whether or not the "horse is out of the barn". The brand is no longer the same and the question now is whether it can be contracted and returned to its original. It is a facinating brand question and living case study.

I am not sure that Starbucks can return. Consider that the brand was built in a time of good economic growth. People had money and were willing to pay $4 for a latte. It was a bit of an extravagance, but Starbucks was not for everyone--it was only for those who appreciated high quality or for those who wanted to be considered well bred enough to appear to appreciate the coffee and the experience. It was the experience (life style) that was being sold. Starbucks created an XM radio music station so that you could "take the experience with you".

Mistakes were made--they are made in every business. From a brand perspective, I cannot quite understand why they licensed their name to franchisees that opened small "Starbucks" at service stops on highways or in college classroom buildings. These bear the Starbucks name, but do not offer the Starbucks experience--just the coffee--but it is made by people who could be working at McDonald's, not baristas like they have in their "real" stores. It is a diluted Starbucks. A mistake.

The economy is bad now and a $4 latte looks a lot more expensive than it did a year ago. Starbucks recently announced a quarterly proft loss of 97%. The company is loosing market share to McDonald's, Dunkin' Donuts and the like. How many of these people will return to Starbucks once the economy improves after they learn that coffee at 1/3 the price is not that bad?

I am not a Starbucks customer, but I wish them well.

Thursday, November 13, 2008

Has AIG Heard of the Word "Optics"?

When I was active as a corporate executive, we had many occasions when our financial situation was not going full steam. There were many times when we had to curtail spending and change policies mid-stream. I remember on many occasions debating with my colleagues whether or not first-class travel, high-priced meetings, and other such spending areas should be curtailed for everyone. The challenge I repeatedly set before our group was this: "what would be the optics of doing such-and-such?" How could we ask employees to cut back if executives still flew first class or had meetings at the Ritz? In fact, we changed several of our executive retreats from high-priced resorts to the Executive Suites, not only to save money, but also to send a message that it was the meeting and not the surroundings that were important.

With this in mind, I listened the other day to the CEO of AIG trying to explain to Larry King the rationale for having a training session for independent agents at a high-priced resort in Phoenix. He explained that training is important for these people to help them sell the right AIG product. He also explained that the company defrayed costs by having sponsors pay for much of the meeting.

I sat an listened and thought to myself: "these people just do not get it". It is a matter of optics. It was going to look bad and should never have been done. No amount of explaining this intellectually will negate the fact that taxpayer money has bailed out AIG and that they are playing at expensive resorts with our money. They may explain how important this was and how they got others to help foot the bill, but the question reamins: why didn't you go to the Executive Suites or Hilton? Couldn't the meeting have been just as well done there and for even less money? I know that they likely already had a contract and might not have been able to cancel, but cancelling and taking the financial hit might have made them look even better. In addition, a television news crew followed AIG executives through the airport trying to get comments. They followed them all the way to their plane through--you guessed it--First Class boarding. Tough times at AIG!!

I am starting to wonder whether it might be worthwhile to bring in outside directors onto the boards of companies the government bails out. We are putting money into companies that got themselves into trouble because of their own bad actions. Their boards were part of those bad decisions and to expect the same boards and same management teams to act more responsibly may be too much to ask. Perhaps the taxpayers need some representation on these boards--after all, we own the companies!