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Disney Stores Plan Makeover

According to the New York Times, Disney plans a major makeover of its stores in the year ahead. I found this story fascinating both because of Disney's retail struggles in recent years, as well as because the news comes just one day after we learn that Oliver Williamson won the Nobel Prize. Williamson's work actually informs us a great deal as we analyze Disney's retail strategy.

Williamson's theories help us understand the merits of vertical integration. In the Disney store situation, we have a case of forward integration, with a company choosing to operate its own retail locations. Williamson basically details how we can think about why companies might wish to be forward integrated in some situations and why they might not choose to do so. He argues we should always compare the costs of performing activities inside the firm vs. cooperating with other firms through contracts and markets.

Why should Disney be in the retail business? Forward integration makes sense to the extent that Disney is doing things at the retail level that are complex, costly, and difficult to do through contracts with outside parties. If contracts work efficiently, then we would allow others to retail Disney products and not be in the retail business at all. To the extent that Disney stores simply sell products like any other retailer, it's hard to justify forward integration. That's why many questioned Disney's store strategy in recent years. In fact, Disney itself tried to outsource the stores to Children's Place, but it didn't work out.

However, to the extent that the stores are true interactive experiences, then Disney may wish to control those retail outlets themselves and can secure key benefits from that ownership of the stores. The direct control enables them to use the stores to further differentiate the brand in the marketplace, raise willingness-to-pay for Disney products, communicate with and learn directly from customers, and drive synergistic benefits across the Disney portfolio (think Apple). Contracting with outside parties to create this type of experience for consumers would be costly and risky perhaps; thus, Disney wants to own this entire interaction with its customers. We'll see if the new strategy works out. The investment will be substantial. However, if Disney wishes to stay in the store business, moving toward a more "experience-oriented" retail strategy provides more sound justification for forward integration than Disney had in the past.

The NetFlix Prize

Fortune had a good article on the NetFlix prize, arguing that it is a good case study on mass collaboration. Indeed, it is. 40,000 teams competed for the $1 million prize. The competition entailed the development of an improvement in the movie recommendation engine at NetFlix. Why is this so valuable to NetFlix? The business model at NetFlix entails being able to accurately help predict what a customer will enjoy, with a particular focus AWAY from the hit new releases. A focus on new releases requires movie rental companies, such as Blockbuster, to stock huge numbers of a title when it is released, only to then find itself with a huge amount of excess inventory just a few weeks later. Thus, NetFlix would like to rent out a more diverse array of titles. Yet, it needs to recommend movies, including many lesser known and older titles, that customers will enjoy. Customers don't know these movies necessarily, so they must trust NetFlix to help them discover what they will enjoy.

What is NetFlix's leg up on the competition? It's not just better statisticians... after all, this was a public competition. Here is the key: As NetFlix's customer base grows, it's movie recommendation engine improves. Why? The algorithms became more refined as the data about customer preferences become richer and more plentiful. Thus, we have a network effect here. The value to a particular customer rises as the number of NetFlix customer rises, because the recommendation engine gets better! With a huge stable of customers, NetFlix has a huge advantage over rivals because of its proprietary database and algorithms. They can't simply be matched by having better statisticians... you also need the sample size and history that NetFlix has. No one else does at the moment.

Reasoning by Analogy - Afghanistan

I read with great interest an article in the Wall Street Journal the other day about two books that are all the rage in Washington, DC right now. Apparently, President Obama and his advisers are reading a book titled "Lessons in Disaster" about the evolution of National Security Adviser McGeorge Bundy's thinking during the Vietnam War. Bundy began as a hawk and eventually began disillusioned with the war effort. Meanwhile, Senator McCain and many military leaders have read "A Better War" - a book that traces the evolution in strategy and tactics that took place when General Abrams took over from General Westmoreland in Vietnam. The book has become very influential with military experts interested in counterinsurgency tactics in Iraq and Afghanistan.

What struck me about this article? First, I hope that President Obama reads both books, not just "Lessons in Disaster" - which is apparently the one he's focused on at the moment. Secondly, everyone reading both books must proceed with great caution. Here we have a classic case of reasoning by analogy that could be very harmful. As people read these books, the natural tendency will be for individuals to reason by analogy from Vietnam to Afghanistan. Yet, we know from research by such prominent political scientists as Richard Neustadt and Ernest May (authors of a great book titled "Thinking in Time" published in the 1980s) that we often reason poorly when we draw analogies. We make mistakes because we focus too much on the similarities between two situations, and we ignore critical differences. Bottom line - Afghanistan is not "just like" Vietnam, and thus, we should take great care in drawing lessons from either of these books as they might apply to our current predicament.

Inbev Sells the Theme Parks

No surprise at all today when I read that Inbev will be selling the theme park business that they obtained during the Anheuser Busch acquisition. It was always rather difficult to justify why a beer company should be in the theme park business. The synergies, clearly, were rather limited. The sale also helps Inbev pay down debt from the deal, as they reached an agreement for Blackstone to buy the theme parks unit for $2.7 billion. This divestiture represents a classic example of an acquirer undoing a case of unrelated diversification which had yielded few economies of scope.

Free by Chris Anderson

On my trip to and from Silicon Valley this week, I read Chris Anderson's new book, Free: The Future of a Radical Price. Anderson is also the author of the best-seller, The Long Tail. Both are excellent, thought-provoking books.

In The Long Tail, Anderson wrote about what has happened to markets that used to be defined by blockbuster hits. In many markets, such as music, it used to be the case that a very small number of hits accounted for a huge percentage of sales. With the emergence of digital music, take a look at a histogram with products on the x axis and volume on the y axis. You see a very long tail, i.e. many products exist that sell small volumes, but together all these products in the long tail actually account for a sizeable chunk of the overall market. These products represent tons of niche offerings that now can be economically sold in digital form, whereas it was not economical to sell them when you were restricted by the economics of a physical store shelf. Anderson documents the various businesses now subject to the long tail effect, and he describes how it has revolutionized a number of industries.

In Free, Anderson describes the various business models that feature a "free" component. Anderson explains how companies have developed models whereby they can be profitable despite the fact that some of their products are available to consumers for free. He does a nice job of explaining how and why so many products have become free... basic economics, really. If a product's marginal cost is approximately zero, and the market is highly competitive, then we would expect price to fall toward marginal cost - in short, price will fall toward free in those situations. Of course, again, the digital revolution has caused the marginal cost of many products such as music to fall toward zero, thus leading to the emergence of "free" in those markets. Anderson's book proves thought-provoking because it helps you think about when you might find yourself competing with a "free" model, as well as helping you think about how to incorporate a free element in your model so as to actually increase profits.

Starbucks: it's not about the coffee!

The debate rages about Starbucks' new instant coffee. I think the debate about the taste actually misses the point. The firm insists that it tastes great. Even if we grant them that point (which some would not), there is still the strategic question. Is this good good for the brand? Eric Felten makes a great point in the Wall Street Journal.

He points out that the instant product is a bit if a contradiction, a mismatch, for the firm, "not because it offends the palate but because it has no romance, it requires none of the effort that demonstrates enthusiasm and passion." In short, Starbucks was always about far more than the taste of the coffee. It was about an atmosphere, an emotion, an experience.

Of course, it's been a long time since Starbucks abandoned the firm's original positioning as a specialty premium differentiated coffee company. It became a mass market coffee company with less and less differentiation from other coffee companies over time. It lost the exclusivity of a luxury brand many moons ago. So perhaps the horse is long out of the barn. At this point there just isn't much that Starbucks won't do in pursuit of growth. Michael Porter argues great strategies require tradeoffs. They become unique by choosing what not to do. Tradeoffs make firms unique and hard to imitate. Yet tradeoffs limit growth to some extent. Many firms violate their original tradeoffs in pursuit of growth. Has Starbucks done that, and in so doing, become far less unique and differentiated?

It Pays to Apologize

The current edition of Business Week has a short note about a new study conducted by scholars at the Nottingham School of Economics in the UK. In the study, the researchers examined over 600 complaints from customers of a German wholesaler. For half of the complaint, which was posted online, they offered customers a short apology and asked them to remove the negative comments from the web. For the other half of the customers who complained, they offered a cash rebate in return for removal of the online comments. Here's the amazing result: 45% of customers who received an apology removed their online complaint, while only 21% of the rebate offer recipients did so. In sum, apologies, even brief ones, can have a major impact on a customer who feels that they have received poor service from a firm.

GM's top management team

Fortune's current issue has a great series of articles about GM's turnaround attempt. The article has an interesting chart about the management team assembled by CEO Fritz Henderson. An amazing stat that I calculated from the chart: the average tenure of a senior team member is 28 years! The shortest tenure is 8 years, but three members have been at the firm for at least 40 years!!! Aren't these the same folks responsible for getting GM to this point? It's hard to believe GM can chart a new course with a team that lacks fresh blood. These may all be good people but shouldn't a leader bring in some people with new and divergent perspectives in this circumstance? A leader always benefits from having some advisers who think differently and who look at things from a different vantage point.

British Airways: Business Class Only Flights

British Airways has announced that it will be launching a business class only flight between New York and London City Airport. I find it interesting, as it is yet another attempt by an airline to find a way to generate true product differentiation in an industry where little true differentiation exists. It's also interesting because several start-ups have tried and failed at operating such a business class only service across the Atlantic.

Of course, this initiative clearly makes more sense than BA's failed attempt to launch a low-cost subsidiary (named GO) to compete with Ryanair and other low cost carriers in Europe. BA's historical strategy and capabilities fit much more appropriately with the business class only concept than the GO concept. Of course, GO wasn't truly an effective low cost positioning, as BA insisted on trying to maintain some of its traditional service elements such as assigned seating.

As for this attempt to offer business class only service, it does face a key hurdle in that flights may have to stop to refuel in Shannon, Ireland because London City Airport's short runway limits takeoff weights. Offsetting that hassle is the fact that London City is closer to the financial district than Heathrow, and passengers can clear US customs in Shannon. Still, a quick-and-dirty calculation performed in my class with my students suggests that BA will have to operate at nearly full capacity on these flights for them to be profitable. Empty seats are a very costly thing, given the high price that will be charged for each seat and the limited number of seats (32) on each plane.

Useful Failures: New Podcast

The Wharton School Publishing website has a new podcast available that I created to talk about the concept of "useful failures" - an idea about which I wrote in my latest book.

Asking Good Questions

Peter Drucker once said that managers often make mistakes because they fail to ask the right questions. This post over at Business Week by Gary Cohen reinforces this classic point by Drucker. Cohen explains how leaders can ask the right types of questions. He notes that many batter their people with questions, but do so in an unproductive fashion. As he says, "Too often managers' questions are designed to show off their own knowledge rather than actually solicit new information or ideas."

Satisfying the Grocery Shopper

What stands out when you compare your shopping experience at various supermarkets these days? One thing jumps out at me... how my groceries are bagged. At most supermarkets, someone throws all my groceries in bags, without any rhyme or reason as to how products are placed. If I've forgotten my reusable bags, then I always have to intervene, lest they put 2 items per plastic bag and fill my carriage with hundreds of nearly empty bags. Regardless of what types of bags they use, I am sure to find several things crushed at the bottom of a bag when I get home.

Now, let's compare that experience to the checkout counters at Whole Foods. There, we see incredible attention being paid to how products are placed in bags. The associates take great care to insure that products do not get crushed in the bags, and that berries and other small items don't spill in the bags. Of course, you might say that Whole Foods can afford to offer such service because of their higher prices and gross margins. However, I wonder... Does it really take more time for the Whole Foods associates to get me through the checkout counter? It seems to me that they are just as efficient as any other supermarket, yet they offer a much better experience. Whole Foods just seems to be taking the time to train their associates more carefully, and perhaps monitor them more effectively. Yes, this does involve some extra expense, but the results in terms of enhanced customer satisfaction are likely to be quite substantial.

I write about this small element of the grocery shopping experience only to point out that the checkout counter often is a defining moment in our retail experience these days. Often, it is the ONLY time that we interact with a store associate, given that most retailers are largely self-service these days. Thus, the checkout counter interaction is a critical moment where retailers can set themselves apart from their competition. It's also a moment when retailers can cause the consumer experience to deteriorate dramatically. Too many retailers, it seems, have focused on making the checkout process fast, cheap, and efficient. However, they have done so at the expense of actually creating a satisfying "closing" experience for the shopper as they head for home.

Keith Murray: Guest Post on Flagship Stores

Professor Keith Murray read my post on flagship stores the other day, and he offers this insightful commentary expanding upon my earlier analysis. In this post, Keith explains how retailers can make the most use of their flagship locations. If you like what you read, check out Keith's own blog at: keithmurrayonbiz.com

Corporate flagship, or“boutique,” stores provide something better than simple profitability! Let’s count the ways!

A day or so ago, Mike Roberto spoke to the need for and importance of company “flagship” stores—say, like The Apple Store, or The Brookstone Store—in major urban locations to be measured on different terms that just profitability. And, he’s exactly right: they are special, they do “cost” a great deal, and—the important point of his blog—don’t typically show much in the way of profitability.
However, that does not mean that they are devoid of other attributes of high value, indeed, they are unique in many ways and should be exploited for exactly those kinds of benefits. Here are some of those factors that speak to this POV that come to mind:

[1] Use the boutique store as a place to gauge customer feedback. Trained [i.e., trained in subtlety, and under-the-radar interview techniques] personnel should routinely be seeking out customers—and particularly new shoppers and brand adopters--to see what attracts them to a product or product feature as naïve prospects. Even though most any brand or product line “owns” a relatively small market share, product and brand managers nonetheless become jaded into believing that they understanding their buyers and prospects; however, that is never quite the case. New market segments are appealed to over time and refining the product/brand relationship as well as the “position” is necessary—a boutique company store is a perfect place to do exactly that.

[2] Video capture of new customer experiences is a great way to exploit the location. Shoppers are usually in a carefree mood and, thus, in a mental state to take the time and to demonstrably react to what sometimes amounts to their first encounter with the product/brand/firm. Videography can be done up-front and formally as well as with hidden cameras—and, with proper authorizations by shoppers—provide the basis for future product or promotion planning by corporate staff somewhere else in the world; also, it could provide a reservoir of actual footage for testimonial ads/commercials in the future for research, planning, and promotion.

[3] Testing lab for future pricing or promotional evaluation. Boutique stores are perfect places—in large part because they are staffed with above-average corporate staff/managers/representatives—to try out promising price breaks or deals, point of purchase signage and offers, etc. While the results of such tests would not be perfectly projectable from a national perspective—data should be pretty promising in terms of what one might want to test more rigorously with a more representative sample of interest; after all, boutique stores in NYC or convention centers in major cities would, by their very location and crowd-draw [e.g., at the very places regional and national meetings are taking place] provide a sample that is fairly heterogenous and geographically distributed.

[4] Stage for major news events, new product launches, etc. Because boutique stores are generally “busy” with shopper traffic, they provide a ready-made, interested, and interesting audience that can serve as a back-drop to key media events and press-conferences. The realness, the frequent excitement that’s “in the air” at such a boutique store is just the right place to make an announcement that is considerably more promising, media-wise, than a sterile, stogy corporate press room in Stamford, CT, or Mountain View, CA.

Clearly, this is not necessarily a complete list of all of the positive attributes associated with a corporate boutique store, but is a start. Can you think of any others that were not mentioned? It’d be great to learn what they might be in a follow-up comment from savvy readers of this blog!

Wall Street Journal To Charge for IPhone Access

Last week, the Wall Street Journal announced that it would begin charging for mobile access, such as through the iPhone app. It's an interesting move, given that this newspaper bucked the trend back in the early days of the web by charging for its online version. All other papers made their online content free; How's that working out for them? The Wall Street Journal has adopted a very successful strategy to date, offering some articles (such as its op-ed pieces) free, but keeping much of the investigative news available only for paid subscribers. I think they will be an interesting test case for the smartphone market. Of course, the key factor remains that the Wall Street Journal offers a very unique, differentiated, high quality product. Thus, willingness to pay for the Wall Street Journal exceeds the perceived value of most other newspapers. At this point, some major city papers have so diminished their content that they don't have something unique and valuable to offer consumers.

For more on the Wall Street Journal's strategic choices vis a vis the Internet, past Chairman of Dow Jones Peter Kann penned an excellent article the other day. It's worth reading because it explains the rationale for the WSJ's decision to charge for online access many years ago.

The Flagship Store

If a retailer is going to have a flagship store in Manhattan, then it has to think carefully about the purpose of that location. All retailers in places like Times Square are paying enormous amounts of money per square foot for rent as well as build-out costs. Many do not operate these stores profitably; they run these retail locations in Manhattan for marketing and advertising purposes. However, too many retailers do not take full advantage of the flagship store concept. They are not creating a powerful brand-building experience. The flagship NYC store is a tremendously cost venture, yet it's also a unique opportunity to bring a brand to life and to emotionally connect with millions of consumers per year. Before putting a flagship store in NYC, companies need to think carefully about how that retail location could and should look differently than their other retail outlets. The purpose of the Manhattan store is different; thus, the experience, atmosphere, and even product selection should be tailored to the distinctive purpose(s) of a flagship store.

Nintendo Slashes Price of Wii

Nintendo has announced a response to recent price cuts by Sony and Microsoft. The Wii will now retail at $199, a 20% reduction in price. They are timing the price cut to coincide with the release of a new Super Mario Brothers game - a smart strategy. One might ask: How can these gaming companies reduce price so substantially? Are they eating into their profits in a significant way? Well, we have to remember two things. First, to some extent, we have a razor and blades business model here. You want to get those consoles into people's homes so that you can them sell them a stream of games at a healthy margin. Second, a substantial cost reduction takes place during a video console technological generation, as firms come down the learning curve and achieve scale economies. Those cost reductions can be very substantial. Thus, prices may be falling, but margins may actually be stable or even improving over time, because the costs come down as cumulative volume of production rises.

Article in Ivey Business Journal

I have just published a new article, adapted from my latest book, in the the Ivey Business Journal, from the University of Western Ontario's business school.

Teen Retailers Cater to Moms

The Wall Street Journal has an interesting story today about teen retailers such as Aeropostale now catering more to moms as opposed to simply focusing on the teens who wear their clothes. The story indicates that some teen retailers recognize a need to focus more on moms during this economic downturn, because the parents ultimately control the purse strings, and they have become more cautious about spending on high-priced clothes for their teen sons and daughters. Interesting, Abercrombie and Fitch indicates that they are making less of a shift toward focusing on moms. That firm will continue to be "all about the senses" with music and a general atmosphere that is much more focused on the teen than the parent. So, we have a clear divergence in strategies, which will make for an interesting horse race... which strategy will work best? It's unclear, of course, but I think there is a clear risk to targeting moms, which is that a brand can become "uncool" to teens very quickly. While focusing on parents may be useful during the economic downturn, there may be long term detrimental effects on the brand positioning.

There's a more general lesson here... retailers always need to be aware of who the actual decision-maker is when selling their wares, as opposed to the person(s) who will be using the products. Sometimes, gaining a better understanding of the consumer decision process can be very powerful. In the case of home improvement, for instance, Lowe's made much headway against Home Depot by targeting women, who often are the key decision-maker on home projects, even though the husband may be the one buying and using many of the construction materials to execute the project.

Mitigating Buyer Power

One worry for many fast moving consumer products companies (FMCG) has to be the continuing consolidation of the retail sector in the U.S. and many other nations. That consolidation has resulted in a substantial increase in power for the retailers relative to the consumer products companies, e.g. Wal-mart and others have huge leverage. What can companies do about this buyer power issue? Well, they could just resign themselves to a future of lower margins, or they could try to cultivate and enhance their alternative routes to market. What do I mean by that? Well, firms often have other channels where they sell their goods, and in some cases, the margins available in those channels are far superior to the mass merchandiser/large grocer channel. Companies need to think creatively about how to drive sales in those channels, many of which may be conducive to higher margin, impulse sales to consumers. Companies also should try to think about how they might offer mass customization of their product via the internet, thereby providing yet another outlet for getting their products to consumers while driving higher gross margins. For instance, companies can offer various forms of personalization via the web (think messages on product labels or the products themselves, monogramming, custom sizes, etc.). All of these efforts to cultivate alternative routes to market mitigate the growing buyer power that consumer products face from the consolidation of the mass retail channel.