In a world increasingly dominated by technology and rapid change, long-established consumer businesses have to fight to stay current.
No consumer business is invulnerable, however powerful it may look. When a business grows to dominate its industry, it soon faces a new and powerful set of challenges – technological surprises, upstart newcomers, a jaded public, incursions from firms and sectors not previously considered competitors.
A 2012 study by Professor Richard Foster from Yale University revealed the average lifespan of a business on the S&P 500 index had dropped from 67 years in the 1920s to just 15 years in 2012. At the time, Foster estimated that by 2020 more than 75 per cent of the S&P 500 would be businesses which the world of 2012 had not yet heard of.
So what are the unique challenges faced by the existing market leaders? And how can they survive a future fraught with danger?
When the game changes
“Turnover of businesses has always happened,” says J. Peter Murmann, associate professor of management at the Australian Graduate School of Management, UNSW Australia Business School. “There is now more competition and more players and we are moving faster.
“However the real danger for incumbents is whether start-ups are doing something not so much in terms of the features of the product, but organisationally in terms of creating the products, marketing them and distributing them. If this new thing is done very differently, then incumbents are in real trouble.”
An obvious example is the music industry over the past few decades. As the product moved from cassettes and vinyl records to CDs, the industry adapted. Yet when the monumental change of digital music via the internet came along – representing an entirely new form of technology, marketing and distribution – even the biggest players in the market capitulated.
“Disney is a classic example … of the strength of the incumbent.” J. Peter Murmann, UNSW Australia Business School
“Look at the 1920s, when suddenly automobile companies came into play,” Murmann says. “They became a huge sector of the economy, which meant the bicycle manufacturers never sold as much. So the turnover of businesses comes from new sectors of the economy opening up, as well as new products and services. In these arenas the incumbent does not have an advantage.”
Does this mean every major business will be swamped by a wave it never sees coming? Absolutely not, says Murmann. Some current businesses will take advantage of these new opportunities. Those that don’t change and innovate could be in for a rough ride.
History helps incumbents (sometimes)
Perform a reality check by asking a simple question, Murmann says. If you had the choice of investing in a leading firm or a start-up, which would you choose? The vast majority would choose existing businesses, simply because of the advantages they hold, such as scale and experience. For instance, Coca-Cola’s long brand heritage both shapes and reinforces its marketing messages.
Well-known brands also have the advantage of being able to move into related markets on the strength of their name recognition. McKinsey analysts Jean-Baptiste Coumau, Victor Fabius and Thomas Meyer noted some recent examples in a May McKinsey Quarterly article, “Incumbents as attackers”: Colgate’s move from toothpaste into toothbrushes, Nivea’s from body care to hair care, and Gillette’s from razor blades to shaving foam. In the process, older businesses can become disrupters themselves.
Apple jumped from PCs to music players before becoming what it is today, the iPhone company that killed Nokia. Virgin has ricocheted from music retailing to aviation to soft drinks to banking.
Yet brand power and historical reach are not enough to keep a market leader at the top of its game. Public perception can work just as powerfully against a major consumer brand.
An example, says Murmann, is the global obesity epidemic. Suddenly a major player in the carbonated drinks sector becomes a symbol of the problem. In a situation like this, when the brand name no longer cuts it, other powers of the incumbent can come into play, such as distribution channels and financial might.
“Disney is a classic example,” Murmann says. “As animation moved from drawing pictures to using computer technology, Pixar was the leader. But in terms of distribution, Pixar relied on Disney. Then Disney bought Pixar to bring the creative genius on board. This is a classic example of the strength of the incumbent.”
Apple constantly acquires smaller firms to bring new knowledge, technologies and skills on board.
Facebook bought McDonald’s tries a start-up turn
McDonald’s Australia has become the shining star of the global McDonald’s business, thanks to innovative moves it made over the past 12 months. With the fast growth of the “informal eating out” (IEO) market, as opposed to the “quick service restaurant” (QSR) market that McDonald’s dominates, newcomers such as Grill’d and Guzman y Gomez were providing a more customisable IEO experience. McDonald’s market intelligence found their customers wanted more in addition to their traditional QSR offerings, and customisation was the key.
McDonald’s Australia made several big changes to its business, but the biggest was the “Create Your Taste” (CYT) offering. The idea was to let customers order a custom-made burger on a touch screen at the restaurant and have it delivered to their table.
“The concept of CYT was not to change McDonald’s. We were listening to what the customer wanted us to provide,” says Mark Lollback, chief marketing officer for McDonald’s Australia and New Zealand. “They wanted us to provide choice and customisation. Our belief was, and still is, that for McDonald’s to be successful we need to operate across both the QSR and IEO platforms.”
A team of six high-performers was handpicked from around the Australian business to make this vision a reality, and they were given only six months to do it to match the rampant pace of the market. The group, Lollback says, had very little hierarchy. Their role was to communicate the team’s actions and intentions to the larger business, and to break down any barriers.
“The customer wanted us to provide … choice and customisation.” Mark Lollback, McDonald’s
So within the business a hungry, talented and fast-moving start-up had launched. This team had the advantage over other start-ups of having the full support of a major corporate, with its executive team effectively running interference for them.
“Previously we were very good at using research, and at constantly testing and refining before going to market, so in a way failure was a bad thing,” Lollback says, “but this time we needed to get out in front of the real customers as quickly as possible to make this work. This was about using the actual customer to help us make decisions.”
The CYT project was conceived, developed and delivered into a few test restaurants within five months. It was then rolled out across the country, and so far has delivered both sales success and met customer expectations. McDonald’s research shows CYT is also bringing new customers in.
By shaping itself more like a start-up, moving quickly, crashing through barriers, doing real-world testing and prioritising innovation, the McDonald’s brand in Australia reinvigorated itself, proved its relevance and showed its leadership.
No sure formula
Of all the dangers faced by existing businesses, the greatest come from sectors that did not previously exist, according to Murmann. Such sectors can negate all advantages traditionally held by an incumbent.
Businesses that assume the shape and attitude of start-ups, or of venture capitalists, put themselves at an advantage. They seed new start-ups with the option of owning them, although folding a new start-up into a large business delivers its own specific challenges.
“We never once changed our core message, which was about optimism.” Ted Ryan, The Coca-Cola Company
Yet sometimes, no matter how prepared an organisation, it can still be ambushed by a new development. “Most of the turnover of businesses comes when the incumbency advantages – namely financial resources, organisational capabilities and brand – no longer give you an advantage,” Murmann says.
“This can happen when a new sector opens up. The closer the new development is to its own sector, the more an incumbent has an advantage. But the big turnover comes from new sectors in the economy.”
Five ways to kill an incumbent
- Technology can dispatch even a huge company ruthlessly. Consider Nokia, the world’s largest mobile phone company at the start of 2007. The smartphone technology revolution, triggered that year by Apple’s new iPhone, sent Nokia plummeting into irrelevance within four years. As a smartphone brand, Nokia is now all but dead. Other recent technology victims include Borders bookstores and Blockbuster video.
- The “perception gap” can kill a company slowly. Surveys show US brands such as Chevrolet and Lincoln can now compete with the likes of Toyota and Mercedes-Benz – but US car buyers, disappointed by US manufacturers’ lower quality in the 1980s and 1990s, continue to turn to Japanese, Korean and European brands.
- Unexpected incursions from a competitor not seen as a rival can stop a business in its tracks. Levis discovered recently that sales of its jeans were being slashed by the popularity of stretchy yoga pants from brands such as Lululemon.
- Economic cycles and financial busts can squash businesses, as the 158-year-old global financial services firm Bear Stearns found out over a few bleak days in September 2008.
- Bad luck and bad timing can push a business over the edge. Competition hurt the iconic Pan Am airline business in the 1980s, but its descent into bankruptcy was triggered by the combination of the 1988 Lockerbie bombing and the 1990 Iraqi invasion of Kuwait, which sent oil prices skyrocketing.
Coke – defending “The Real Thing”
One hundred years ago a bottle was designed that would become a commercial icon. Coca-Cola
was first sold in 1886 at a soda fountain in an Atlanta pharmacy, where customers would pay for carbonated water mixed with a flavoured syrup. It began to be bottled on a large scale in 1899, and 12 months later it was being sold in every US state, as well as by soda fountain in Mexico, Canada and Cuba.
While some rivals developed their own branding and flavours, many blatantly ripped off the Coca-Cola image and recipe, leading to numerous expensive lawsuits. One way for Coca-Cola to differentiate itself was to develop a distinct bottle design.
The Root Glass Company from Indiana won a national competition with its “contour” bottle modelled on the distinct shape of the cocoa pod. That new bottle was patented by Coca-Cola in November 1915.
A business that had been under attack turned a negative into a positive, which is still being celebrated a century later.
“The big turnover comes from new sectors in the economy.” J. Peter Murmann, UNSW Australia Business School
“In 1915, when the bottle came out, we actually had a great print ad that said, ‘We bottled up the pirates of business’,” says Ted Ryan, Coca-Cola’s director of heritage communications. “And then the text went on to say: ‘When you see this shape, you can now rely on the fact that you’re drinking the real thing’. So the bottle itself became an instrument of trust with the consumer.”
It was a brilliant coup but in no way meant that Coca-Cola could rest on its laurels. Such is life for a large, successful business. Today, more than ever, the pace of business and technological change means that threats become reality faster than ever.
Coke - exploiting brand heritage
“I believe a lot of the answers to tomorrow’s challenges lie in our archives,” says James Somerville, Coke’s vice-president of global design. “The beauty is if we can find something that worked in the 1920s or ’30s, we can begin to look at how we make that solution relevant to today’s audience.”
During the global financial crisis, an advertising executive asked the company’s heritage communications team to review all advertisements created during the Great Depression.
“The story that came back was that we never once said that things are bad and we are going to help make them better,” says Coke’s Ted Ryan. “We said, ‘Take a pause that refreshes, a moment of optimism’. That’s when we created the Coca-Cola Santa Claus. And that’s when we began heavy use of Norman Rockwell advertising. But we never once changed our core message, which was about optimism.”
This article is from the October issue of INTHEBLACK