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A leading innovation and marketing blog from Braden Kelley of Business Strategy Innovation

Saturday, August 19, 2006

Starbucks and Big Tobacco

Back in the 1950's smoking was glamorous, and just about everybody who was anybody smoked cigarettes. Then came the discovery, to the shock of millions, that sucking smoke into your lungs might not be good for you. Then came another revelation that one of the substances in tobacco, nicotine, which was used as a poison by the Egyptians during the times of the Great Pyramids, is addictive. People then began a mass exodus from the consumption of nicotine via inhaled smoke.

Goverments now felt permission to introduce 'sin taxes' to raise tax revenue while discouraging consumption. Today, 'sin taxes' push the cost of a pack of cigarettes to more than $5 in most places. Smoking was then prohibited on public places like airplanes, goverment buildings; in some states and countries it was banned in all public places, including bars and restaurants. Taxed out, shut out, and scared away from smoking, where were people to go for their feel good, legal drug fix?

In one word, they go for "coffee" ...

In the United States, and increasingly the world, they go to Starbucks. Starbucks has become a huge global corporation from its headquarters in Seattle, Washington, by relentlessly focusing on delivering an expected, uniform, mass-customized product regardless of geography (the McDonald's model). Starbucks is credited, wrongly, for turning coffee drinking into an experience. Attempting to create a more European coffee experience is what they have really done.

But why was Starbucks' success suddenly possible when it wasn't before?

The answer is that three trends came together at roughly the same time, creating a perfect storm:
  1. The rise in demand for "affordable luxury"
  2. The decline of smoking
  3. The increasing variability in the quality of a cup of coffee
So where is the innovation?

The provocative answer is that there was none. Starbucks smartly applied the McDonald's consistency focus to coffee, combined it with a more European ambience (a place to socialize on an everyday basis, an extension of one's living room), and created scale. Scale has allowed Starbucks to build a brand, and scale has allowed them to expand their distribution as a result. The troubles that Starbucks is starting to face are because of their inability to create innovation capable of sustaining their competitive differentiation.

The latest news headlines ("Heat wave boosts cold drink sales, slowing profitable hot drink sales") would have you believe that Starbucks' flattening growth is due to their own innovation. The difficulties that Starbucks is beginning to face, and will continue to face, are common to all companies who grow beyond the steep part of the growth curve (which has somewhat of an 's' shape). Once you reach that point as a retailer, then growth from increasing the number of stores is insufficient to drive share price appreciation by itself. The now large installed base of stores becomes more important to stock analysts through the measure of year-on-year same store results. Starbucks is struggling to drive same store sales growth, and to find innovations.

This is why they have brought in Geoffrey Moore of "Crossing the Chasm" and "Inside the Tornado" fame to advise them. I respect Geoffrey Moore's work and think his latest book "Dealing with Darwin" provides a useful framework for selecting an innovation focus to shape a company's strategy - that's why we list his books on our Pearls of Wisdom page here on the Business Strategy Innovation site.

What Starbucks needs however is to move beyond seeking product innovation - which to this point has included the addition of food or media (music, books, etc.) to a lukewarm reception. Starbucks needs to move beyond being known as the gold standard for coffee, towards the creation of a business model innovation and even towards changing their industry. This is of course our specific innovation consulting focus.

Starbucks is a phenomenally successful company, the envy of all coffee retailers, and with good reason. To get to the next level in share price appreciation, however, it needs to expand beyond the "consistent coffee experience" they have developed and create additional must haves in people's daily routines, beyond providing their latest caffeine fix to get them through the day.

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Friday, August 04, 2006

Wal-Mart Goes Green - What about your company?

transportation innovation

With the price of gas above $3.00, some companies (and hopefully all) are beginning to look at the fuel efficiency of their fleets. Wal-Mart is the most public example of this with its trucking fleet. Its efforts include:
  1. Side skirting and installation of other aerodynamics to improve fuel economy
  2. Use of super single tires, and other weight saving measures to decrease diesel consumption
  3. Installation of Auxiliary Power Units to power human conveniences during stop-overs
  4. Cooperation on the development of hybrid propulsion technologies for their trucking fleet
Wal-Mart's efforts are aimed purely at cost cutting, but it is also getting the added public relations boost for being "green-minded" for its efforts. Wal-Mart expects to save $52 million per year in fuel costs from its conventional efforts and un-specified amount from the use of hybrid propulsion in the future.

But are companies going far enough?

Should companies be reconsidering their fleet vehicle purchases? Fleet vehicle purchases after all, should be determined not by whoever gives the fleet purchasing manager the biggest discount or takes them out to the nicest dinner, but by the true operational and financial goals. To make truly cost-efficient and "green-minded" fleet purchases, questions need to be asked such as:
  1. What is the expected typical passenger load (number of people carried)?
  2. How many different key passenger load scenarios are there?
  3. What percentage of trips involve the carrying of bags or cargo?
  4. What is the expected typical cargo volume and weight?
  5. How many different cargo load scenarios are there?
Notice that my questions focus on typical loads rather than average loads. The reason is that a fleet should never be homogeneous because the needs of the users are not homogeneous, and in many cases you may over-spend on your fleet by trying to meet average requirements. What are the costs of a vehicle fleet? Quickly, we have:
  1. Purchase cost of vehicles
  2. Insurance
  3. Fuel
  4. Depreciation
  5. Maintenance
  6. Overhead (Fleet Purchasing, Fleet Management, Fleet Liquidation)
  7. Space to park vehicles
  8. Positive or negative branding effect
How can an organization minimize costs?

Some organizations standardize on one vehicle so that they can buy them in bulk and get a big discount. The result is usually a higher than ideal specification that likely raises negative costs of all but overhead.

Other organizations organize their fleets like rental car agencies where members "purchase" time like they would with Hertz or Avis (by vehicle class). Each vehicle class has a different price, and you would hope this influences vehicle selection by end users, but in practice price differences are usually so small that people are likely to trade up.

One other approach is a branding-focused approach. Foxtons in the United Kingdom is an example of this approach. Foxtons is a real estate firm expanding to the United States from the United Kingdom, and they standardized in London on Mini's with distinctive paint jobs that they change about every 3-6 months to keep the branding fresh. The Mini might be a good choice for branding because they are sporty and fun, which appeals to their main target market young renters, and they are a good choice for parking in a cramped city like London. However, they are a poor choice for the business because they only come with two doors so you've got clients climbing in and out of the back seat through the front door when out with agents viewing properties. A four door Volkswagen Golf, Mercedes A class, or equivalent Peugeot or Renault might have been a better choice.

So, what's the ideal solution?

The ideal solution will be different for every company. In every situation, you have to start with your goals. In Foxton's case where it wanted to focus more strongly on branding, they nearly got it right. If the Mini came with four doors, they would have been spot on for their goals. Instead they should have chosen a sporty, compact four door fleet instead.

Most companies' main goal will be to minimize cost. To do this the goal will be to focus on the usage of the vehicles in the fleet and cut vehicle size at every opportunity, resulting in decreased costs for purchases, depreciation, fuel, maintenance, insurance, and space to park the fleet. Total cost of ownership should be the key driving metric per car class, and reducing total overall fleet ownerships costs should be the main goal. The police department in London recently started purchasing some BMW's to use as police cars because even though the purchase cost was higher, the total cost of ownership is expected to be lower.

For a company like Progressive or Geico who have fleets for insurance adjusters to travel around and write estimates and the like, my recommendation would be to standardize on a fleet of either Smart Cars (60mpg 2-seaters from Mercedes), or a fleet of Toyota Yaris or Honda Jazz automobiles. This would likely lower all of their costs when compared to their current fleet, including a boost from improved branding. An economy car fleet would communicate that Progressive or Geico are low cost (even if they aren't).

For companies with heterogeneous fleet needs, this means heterogeneous fleets designed around first asking "How many people and how much cargo?" If the answer is one person, you might get a Toyota Yaris. If the answer is four people you might still get a Toyota Yaris. If the answer is three people plus three suitcases for a week trip, maybe you get a Toyota Prius.

These are very general potential solutions, and in practice they would require much more detailed fleet usage research and conversations with the marketing department. These conversations would focus on the branding impact of fleet choices (and possible marketing contribution to fleet purchase where marketing's choice is more expensive). Research would also include usage sampling, user interviews to better understand vehicle needs, and total cost of ownership research for each considered vehicle class.

Please contact us if you would like to work with us on such a project.

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Wednesday, August 02, 2006

The Importance of Packaging

Let's talk about packaging. Packaging can be thought about in many different ways, but if we think purely about the purpose of packaging first, we find the purpose is to:
  1. Contain the product
  2. Communicate product information
  3. Facilitate product storage and shipment
  4. Reinforce branding
Innovation in packaging

The fourth point (branding) is truly part of the second point (product information), but it bears special mention here for discussion.

If you look at the packaging for the iPod, it satisfies the first point (product containment), and excels at the third (storage and shipment) because it is a cube. But what about the second (product information) and the fourth (branding)? What does the packaging communicate about the product? The answer is that the packaging simply and elegantly communicates that:


  1. This is a premium product
  2. This is a product from Apple
  3. This is an iPod (assuming you know what one is)
  4. Some product information (assuming you're pro-active enough to look at the bottom of the box)
revenue innovation

Most companies focus on #4 and trying to make sure the box has every piece of information that might cause you to purchase the product. Apple recognizes that for this product, by the time you see the box, you have likely already made your decision to buy. This means the purpose of the packaging is more about validating that purchase intent and allowing the prospective buyer (after handling the box) to verify they've got the right version.

By focusing on #4, the manufacturer communicates that this is a commodity product and its purchase, the manufacturer believes, is driven by one of the many product features described on the packaging.

Let's now look at a video that shows how Microsoft would likely have designed the iPod box if they were the company that had come up with the shipping product instead.

Please view the video of Microsoft's re-design of the iPod packaging and then come back for the rest of our article.

From the video you should see clearly the difference between the Apple approach and the Microsoft approach.

profit innovation

The question is, which is better? There is no unilateral answer as it depends on the customers' expectations and expected interaction with the packaging. Apple's package is designed well for the expected interaction (primarily post purchase decision) and for the customer expectations (ease of use, premium product). The Microsoft package design shown in the video might actually be preferable in an environment where there are no salespeople available, no sales collateral is available, and the customer is expected to have limited knowledge of the product. The Microsoft package design is also preferable for situations where the customer is expected to compare packages in the aisles prior to making a purchase decision.

Finally, do not underestimate the importance of how the opening of the packaging works. Manufacturers, please stop cutting my skin to shreds with your "cheap" clamshell packaging. Nobody likes this packaging other than "shrinkage" managers at major retailers. So manufacturers, please stop using it!

cost reduction innovation

Apple is famous for its out of the box experience. Think about how your customer will want to open the box and begin using the product. Take special care in structuring the order that things come out of the packaging, what people see when they open the packaging (what's on top, any messages they might see, etc.), and how the packaging opens.

Bringing it all back together, for a package design to be "good", you should end up with a package that contains the product, communicates the appropriate level of product information, facilitates ease of storage and shipment, and that reinforces branding. Anything less and you are missing an opportunity to maximize revenue and lifetime customer value.

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