Changing the Game – Follow-up

 Uncategorized  No Responses »
Jul 132007
 

In a recent post, I discussed the dramatic disparities in the market capitalisation of PepsiCo and The Coca-Cola Company, as a result of the different market strategies adopted by the two companies.

A good colleague, Bob Houk, had a different take:

Mark:

First, I’m not sure your premise is correct, at least as far as Pepsi/Coke are concerned.

If the moves into other categories were what caused the market cap change between 1998-2005, then they were a long time coming — the Frito-Lay acquisition took place in the early eighties, I believe (maybe earlier), and Quaker/Gatorade was also long prior to the period mentioned. They were part of an overall broadening of the company that included other moves that worked out less well (e.g., acquisition of several fast-food chains that were later dumped). If this was done with an eye to the changing beverage tastes of the public, then Pepsi was very far-sighted and patient.

Another case of redefining one’s mission in order to grow, though, was the convenience store business. They grew in large part by making themselves into gas stations (it’s hard to remember now that early c-stores did NOT sell gas). When I did some consulting for Circle K (#2 in the US market at the time) in the early eighties, the first thing I learned was that gas was 1/3 their sales (ans beer 1/3 the balance — a scary combination). Southland (7-11), their rival, became the #1 gas retailer in the country.

The change left them vulnerable, though, because the gas companies eventually responded by turning their service bays into c-stores, and over-saturating the market. Circle K and Southland both suffered badly and were later acquired by other companies.

Bob

I think we’re both (largely) in agreement. In my response to Bob, I wrote:

I do not believe that PepsiCo moved into chips or non-cola drinks with “an eye to the changing beverage tastes of the public”. Rather, they (I believe) realised that, after more than a century of head-to-head competition against Coca-Cola, they were probably a tad narrow in their definition of the market they were competing in.

If you harken back, there were times when Coca-Cola sales reps were forbidden to utter the Pepsi brand, and vice versa, such was the intense rivalry between the companies. They could not discuss or reference the other company in their corporate pow-wows or off-sites.

Given the corporate  culture, the rivalry, and the profits inherent in going head-to-head against each other in the ‘Cola Wars’, it would have been very easy for either/both Boards to continue their detente against one another – through product iteration (blueberry cola anyone?), price wars, product portion strategies, channel cannibalisation etc.

But the PepsiCo Board sat back and (I believe) asked itself: “With our resources, our brand position, our consumer + market insight, is this the best we can do? What market do we truly compete in?”.

They answered that question in a manner wholly different to the way Coca-Cola did. As a result, they saw their true market environment as being more than just cola flavoured drinks. They realised the ‘share of wallet’ that they were competing for was more than just fizzy sugar, and they diversified accordingly, and reaped the benefits.

The  move into fast food (Tri-Con) was, I believe, more about buying better distribution for their cola product than furthering their strategy of expanding/deepening their wallet-share.

Now the example you cite re: c-stores is a classic one – companies that develop strategy in a vacuum. Most companies either devise market strategy without considering how their immediate competitors will react (rookie mistake). Nearly all companies devise market strategy without understanding that their business/market is part of a ‘commercial ecosystem’, and as such other companies beyond their traditional competitors will react (ergo gas stations responding to soda sellers).

Personally I wonder whether the Cola Wars need have lasted as long if either company truly understood ’3rd Horizon strategy’.

This is a topic dear to my heart, so I welcome other/new opinions.

Learning from PepsiCo: Changing the Game

 3rd Horizon, entrepreneurs, innovation, investment, Leadership  1 Response »
Jul 092007
 

In 2006, for the first time in 108 years of head-to-head competition, PepsiCo was worth more (in market cap terms) than The Coca-Cola Company, even though Coke still outsells Pepsi almost 2-to-1.

In 1998, Coca-Cola’s market cap was $US220 billion and the company’s stock price was trading in the high-$80s. Fast forward to 2006, and Coca-Cola’s stock price had plummeted to near the $40 mark. Worse yet, in December 2005, Coke’s market cap for the first time in history fell below that of PepsiCo’s (see note below).

Where did Coke go wrong?

Coke failed to recognise that consumers’ emerging preference for other soft beverages – water, teas, and sports drinks – would fracture demand. Instead, they ridiculed initiatives by rivals to expand into non-carbonated drinks.

As a result, Pepsi’s Aquafina became the No. 1 water brand, with Coke’s Dasani trailing; in sports drinks, Pepsi’s Gatorade owns 80 percent of the market while Coke’s Powerade has 15 percent.

Importantly, Pepsi took an even broader view than other competitors of its core market, expanding into non-beverage markets through the acquisition of Frito-Lay Snacks and Quaker Foods; the former now controls 60 percent of the U.S. snack-food market.

In short, Pepsi didn’t out-compete Coke. It changed the game.

At some point, the Boards of both Coke and Pepsi faced the same question: How much money and attention should be focused on a new, but growing, operation that is far less profitable than the core business?

Both Coke and Pepsi’s business systems were geared to selling soda, which generated enviable margins for more than a century. The profit margins on selling other drinks paled in comparison. Pepsi made the move in response to obvious shifts in consumer demand, and reaped the rewards.

In this case, it wasn’t a technological innovation (i.e. better, fizzier soft drinks) that broad-sided Coke. It was a business model innovation (becoming a “total beverage company”).

There are some important lessons here from which any company can learn. Specifically, established companies are at risk of falling into

the same “competency trap” that Coke did – continuing to invest in their traditional core competency to such a degree that they become unresponsive to the wider market play.

(Note: As at the time of writing, the market cap imbalance appears to have been rectified – PepsiCo’s M/C was $US107.87B compared to Coca-Cola’s $US121.50B. However, this is a little misleading. PepsiCo’s shares closed at $US66.22, compared to Coke’s $US52.60, and PepsiCo had a P/E of 19.50 and Earnings Per Share of $3.40, which is much healthier than Coca-Cola’s, at 23.51 P/E and EPS of $US2.24)

 

2/10 Technologies & Trends, or "macro-myopia"

 innovation, Media, Strategy, Web 2.0  No Responses »
Jul 082007
 

I’ve long recognised that there is a category of technologies and trends that are “2/10 signals” or events; that is, technologies (and their underlying trends) which largely fail to live up to the ‘hype’ in the first two years of existence but that, when we look back ten years later, we see that technology represented a significant inflection point that had broader, unrecognised (or unanticipated) impact.

I’ve recently stumbled across a quote from Paul Saffo, Director of the Institute of the Future, who summarises this aspect of new technology far more eloquently:

 ”It’s a very consistent pattern in this business that collectively as a society and as individuals we all suffer from what I call macro-myopia. A pattern where our hopes and our expectations or our fears about the threatened impact of some new technology causes us to overestimate its short-term impacts and reality always fails to meet those inflated expectations. And, as a result our disappointment then leads us to turn around and underestimate the long term implications – and I can guarantee you this time will be no different. The short-term impact of this stuff will be less than the hype would suggest, but the long-term implications will be vastly larger than we can possibly imagine today.this revolution is more than unpredictable.”

As I survey the Web 2.0 landscape, I see much that makes me think of this quote.

 

How will tomorrow’s consumers differ?

 Culture, Strategy  No Responses »
Jul 062007
 

The UK Centre for Future Studies has released several studies outlining key demographic changes over the next 15 years, and the impacts these changes will have on lifestyles and consumer values. The following are some excerpts from their findings:

  • We will be living in an older society. This will be the result of increased longevity, and a declining birth rate. The over fifties are the new old. They are healthy, active, and experiential.
  • We will be living increasingly as single individuals and individualism will become paramount. Indeed, the outlook of the individual will be all the more important because peoples’ values are becoming increasingly focused on themselves. The term ‘masses’ will have no meaning. We will need to think about the needs of groups of individuals.
  • The ‘traditional family’ – married with 2.4 children living with both their biological parents – will be in the small minority. Trends in co-habitation, divorce, births outside marriage and single parents will be even more pronounced. With declining family obligations, individuals will exercise greater choices and this will lead to greater diversity of lifestyles. Traditional marketing categories will no longer be relevant. Paradoxically, however, while the traditional family will disappear, family values will continue to be important.
  • We will be a far better educated society with increasing standards of achievement and higher qualifications. This means there will be greater numbers of individuals who are able to use and benefit from information technology and more people able to work competently within the IT-centric working environment.
  • We will be living in a 24/7, globalised society in which individual lifestyles will be based on mobility rather than stability. As a result, personal identities will become more fluid. At the same time, individuals in a more unstructured and rootless society will feel more insecure. They will experience greater uncertainties and see society as high risk and threatening.
  • We will be a far more health conscious society and there will be a paradigm change from cure to prevention. Health promotion will be big business and food safety will be a paramount consideration. Basically, we will become increasing fearful about what can harm us and we will be looking for re-assurance that what we buy is safe.
  • We will become a society totally overwhelmed by messages and choices. As a consequence, we will be looking to simplify our lives and create a sense of stability and security out of chaos and complexity.
  • For most of us, time will continue to be at a premium. Work and leisure time will intermix and in the 24/7 society, set routines will become a thing of the past, and work will become increasingly more significant. To create more time for ourselves we will be taking advantage of time saving technologies.
  • We will be a far more demanding, hedonistic society. We will consume experiences and search for novel entertainment and fun fulfillment in all aspects of our lives. Good enough will not be good enough. We will expect the highest quality and value for money.

Food for thought!

 

Meta-Convergence and Demand Singularity – Part I

 Culture, Media, Strategy, Web 2.0  2 Responses »
Jul 042007
 

For the past 24 months, I’ve been seeing signs that a unique strategic challenge is emerging, one which will significantly impact every industry, including media, before the end of this decade: demand singularity.

We can already see that a form of ‘meta-convergence’ is happening in nearly all consumer industries, in that more and more companies are trying to be all things to all people. They are trying to sell everything to everyone.

Coca-Cola no longer sells just cola – it sells water, fruit juices, energy drinks and teas/coffees. Pepsi Co. is now the largest US vendor of potato crisps and similar snacks. McDonalds no longer sells just burgers, it sells salads, yoghurts, cereals, and cafe-style coffee. Woolworths doesn’t just sell groceries, it offers banking, petrol, electrical and whitegoods, music (including iTunes cards).

Today, there was news that the eponymous watchmaker, Tag Heuer, was moving into the eye glasses market!

We’re seeing a similar meta-convergence in the media space.

Newspaper companies, like Fairfax, now offer music, video news, audio programs and, elsewhere, movies-on-demand. Web publications are moving into print and vice versa (e.g. Sensis/Trading Post). Search engines are moving into rich media and broadcast media (Yahoo! + Google). Electronic games companies are moving into cinema. Outdoor advertising companies are embedding mobile media capabilities. The list goes on.

The root cause of this trend is economic.

Companies are leveraging technological efficiencies to re-engineer traditional value/supply chains, in an effort to squeeze additional profit or growth through ‘economies of scope’ (i.e. cost savings achieved by increasing the variety of goods and services produced using existing infrastructure/staff).

This trend is likely to continue (and accelerate) for the remainder of this decade.

Continue reading »

What is driving Rupert Murdoch?

 Media  2 Responses »
Jul 042007
 

A key driver of News Corp’s current, aggressive Internet acquisition and growth strategy is Murdoch’s personal recognition that his “old media” empire is at serious risk of financial ruin and – worse – becoming irrelevant to a growing percentage of his target audience.

This awareness was spurred largely by the release of a research report, titled Abandoning the News, prepared by the non-profit Carnegie Corporation, which reported that:

There’s a dramatic revolution taking place in the news business today and it isn’t about TV anchor changes, scandals at storied newspapers or embedded reporters. The future course of the news, including the basic assumptions about how we consume news and information and make decisions in a democratic society are being altered by technology-savvy young people no longer wedded to traditional news outlets or even accessing news in traditional ways.

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While it is premature to definitively judge the impact of this revolution on public affairs, political discourse or on journalism itself, the writing is on the wall: the course of how the news will be delivered in the future has already been altered and more changes are undoubtedly on the way. How can we expect anything else, when the average age of a print newspaper reader is 53 and the average age of both broadcast and cable news viewers is about the same? Baby boomers read newspapers one-third less than their parents and the Gen Xers read newspapers another one-third less than the Boomers.

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Through Internet portal sites, handheld devices, blogs and instant messaging, we are accessing and processing information in ways that challenge the historic function of the news business and raise fundamental questions about the future of the news field.

Murdoch has clearly recognised that the shift of news consumption among the younger population away from print and towards electronic media is the “thin edge of the wedge”, and that similar moves will start to impact his traditional TV broadcast and cable interests as well. As a response, he is positioning News Corp as the ultimate “online content destination”, which will distribute content from his myriad sports, news and entertainment properties and, in doing so, amass a significant global audience.

The recent US$5 Billion bid for Dow Jones (and its key asset, the Wall Street Journal) is a continuation of that strategy.

Murdoch was recently quoted in Times magazine confirming the changing economics of newspapers:

“You’ve really got to worry,” he says. “Tribune Co.’s revenues [in May] dropped 11% across broadcasting and newspapers. That’s huge. The Times dropped 8.5%. Half of men under 30 aren’t reading print newspapers, and there’s no sign that they come back as they age.”

The commercial pressures to move to digital distribution platforms featured high in his rationale for mounting the bid for Dow Jones. He also justified the purchase to key executives and stakeholders on the basis that he can leverage both the masthead and the content across News Corp’s multiple distribution channels

“We’ll sell our business news and information in print, we’ll sell it to anyone who’s got a cable system, and we’ll sell it on the Web…It almost ensures the price is worth paying.”

But the real clue to Murdoch’s end game – though not just for the Wall Street Journal – lies in the rhetorical question he posed to the Time magazine journalist:

“What if, at the Journal, we spent $100 million a year hiring all the best business journalists in the world? Say 200 of them. And spent some money on establishing the brand but went global – a great, great newspaper with big, iconic names, outstanding writers, reporters, experts. And then you make it free, online only. No printing plants, no paper, no trucks. How long would it take for the advertising to come? It would be successful, it would work and you’d make … a little bit of money. Then again, the Journal and the Times make very little money now.”

It would be an ambitious strategy, but if executed correctly, an immensely successful one.

We’re rapidly moving to a post-platform media world. In 10-15 years, most of the developed world would have access to converged media devices. The notion of changing devices or platforms as you accessed different types of media will be considered quaint at best. There won’t be a device called a ‘television’, or a device called a ‘radio’, or a device called a ‘newspaper’.

In such a world, where digital distribution would literally enable  millions of channels to be accessed on these multi-purpose devices, brands will play a key role in determining market share (i.e. audience).

When harried consumers have more choice than they could conceivably handle (even at a cognitive level), they will flock to ‘anchor’ brands – trusted experience custodians. Owning the Wall Street Journal masthead – providing Murdoch can safely navigate its embrace of digital distribution – will provide News Corp with an immense advantage in such an environment, positioning him to capture a large portion of the global audience for trustworthy financial news, opinion and insight.

And where the audience is, advertisers will surely follow.