Wednesday, February 23, 2022

Strategic Deterrence: P&G, Clorox, and the Bleach Category

This month, we have read and heard a great deal about strategic deterrence at the geopolitical level.  The news spurred me to think about how I teach in our business strategy course about deterrence with regard to incumbents and potential entrants in a particular industry.  I often tell students the story of Proctor and Gamble's attempted entry into the bleach market in the 1980s.  Clorox, of course, was the massively successful and entrenched incumbent in the category (as they still are today).  Former P&G CEO A.G. Lafley recounted the story of P&G's failed entry into that market in a Harvard Business Review interview in April 2011.  The article was titled, "I Think of My Failures as a Gift."  Here's an excerpt from Lafley's remarks: 

In the 1980s P&G tried to get into the bleach business. We had a differentiated and superior product—a color-safe low-temperature bleach. We created a brand called Vibrant. We went to test-market in Portland, Maine.   

We thought the test market was so far from Oakland, California, where Clorox was headquartered, that maybe we could fly under the radar there. So we went in with what we thought was a winning launch plan: full retail distribution, heavy sampling and couponing, and major TV advertising. All designed to drive high consumer awareness and trial of a new bleach brand and a better bleach product.

Do you know what Clorox did? They gave every household in Portland, Maine, a free gallon of Clorox bleach—delivered to the front door. Game, set, match to Clorox. We’d already bought all the advertising. We’d spent most of the launch money on sampling and couponing. And nobody in Portland, Maine, was going to need bleach for several months. I think they even gave consumers a $1 off coupon for the next gallon. They basically sent us a message that said, “Don’t ever think about entering the bleach category.”

I use this story as an example of how an incumbent can send a very strong signal to a potential entrant, in hopes of deterring that firm from entering the market.  The signal essentially states loudly and clearly that the incumbent will fight aggressively if the other firm enters the market, rather than accommodating that entry.   Incumbents would like to issue this type of credible threat if they can, because any signal that they will pursue accommodation makes it more likely that the challenger will enter their market.  The key is to make the threat of a fight highly credible.  Putting a free gallon of bleach on every doorstep is a classic example of a clear and credible threat. 

Interestingy, Lafley notes that he learned a valuable lesson from this failure.  He explains, "When Clorox tried to enter the laundry detergent business a few years later, we sent them a similarly clear and direct message—and they ultimately withdrew their entry."

Thursday, February 17, 2022

Louis Vuitton, Luxury Brands, & Inflation

The Wall Street Journal reports today that Louis Vuitton "increased its handbag prices globally this week, in some cases by double-digit percentages, according to Bernstein Research."  Louis Vuitton, of course, is a major brand house within the global luxury brand conglomerate, LVMH.  The parent company owns a variety of luxury brands including Bulgari, Givenchy, Tiffany, Christian Dior, Moët & Chandon, and Dom Pérignon.  Last year, I published a case study about LVMH's acquisition of the American jeweler, Tiffany.  Thus, I took special interest in this news today. 

The article quotes LVMH's CEO, Bernard Arnault: “We have an advantage on quite a few other companies and groups, which is that we have a degree of flexibility on our prices. In the face of inflation, we have the ways and means to react.” In addition, the article quotes Kathryn Parker, an analyst at Jefferies Group: “Luxury really is immune.  They have the pricing power to offset any underlying cost inflation.”

The story caught my attention because many firms will face an interesting challenge in the months ahead.  As costs rise, can companies increase prices accordingly to maintain margins? Unlike LVMH, some firms will find it difficult to pass on those increased costs in the form of higher prices. Companies need to ask themselves: Are we investing in the activities that will maintain or enhance willingness-to-pay on the part of our customers? In some industries that are quite different than luxury goods, competitors with deep pockets and strong balance sheets will take the opportunity to NOT raise prices as much and try to grab market share during this inflationary period.  Similarly, companies with huge cost advantages over rivals may undercut their competitors and steal customers.  If they have a cost advantage, competitors will not be able to match those price cuts without seriously damaging their bottom lines. Therefore, understanding the competitive landscape, and the cost structure and balance sheets of your rivals, is critical as one contemplates price increases.  

As firms think about how to adjust prices given the rampant inflation taking place, they have to think carefully about the investments required to continue to maintain or enhance willingness-to-pay.  Are we investing appropriately in research and development, product quality, customer service/experience, and the like?  Do people perceive our products as having higher value rival and/or substitute products?  Those firms making the right investments will be able to increase prices to account for cost inflation, while others will find customers balking at the price tag for their products and services.  

Monday, February 14, 2022

Becoming More Resilient: Three Excellent Tips


At several faculty meetings in recent weeks, my colleagues and I have been discussing how and why many college students seem to be suffering from a lack of resilience.  Obstacles, challenges, and failures turn quickly into crises for many students.  Some struggle to overcome seemingly small setbacks.  To some extent, all of us have exhibited insufficient resilience over the past two years; the pandemic has worn us all down in many ways.  With these recent conversations in mind, I started searching for some good resources on resilience. I came across a few excellent tips from Lauren Eskreis-Winkler, an assistant professor of management and organizations at the Kellogg School of Management (Northwestern University).  She offers several suggestions for how to shape and develop organizational cultures that foster employee resilience.  

1.  Focus on learning from our own successes and others' failures.  Eskreis-Winkler reminds us that attribution bias causes individuals to struggle when it comes to learning from our own failures.  That inability to reflect and learn from our failures inhibits our resilience at work.  She explains:   “People do not struggle to learn from their own success. Nor do they struggle to learn from others’ failures.  Someone else’s failure is not upsetting or threatening. It’s just information."  In short, promote learning whenever you can, and recognize that some forms of learning are much easier to accomplish than others.  Use attribution bias to your advantage! 

2.  Try to remove the stigma of failure.  She argues for more transparency when it comes to projects that do not achieve desired goals.  Employees need to understand that they are not alone.  Mistakes and failures occur all the time.  She explains: “Business leaders can create cultures where the actual rate of success and failure is known to each employee.  This normalizes failure in an organization, creating an environment where a certain rate of failure for new products and initiatives is totally acceptable. This knowledge alone makes people less upset by personal failure, and as a result, more likely to learn from it.”  I would argue that the tone needs to be set at the top.  If senior leaders are open to discussing their own mistakes and failures, that goes a long way to removing the stigma of failure for all employees in the organization.  

3.  Stop framing activities and initiatives as "wins" versus "losses."   We can learn and improve in anything that we do, even if we have been quite successful or if we have stumbled badly.  In every "successful" initiative, we can find opportunities for improvement.  In every "failed" project, we can find small victories, moments of strong performance.  I'm reminded here of the U.S. Army's After-Action Review process.  They try to learn from every mission.  They purposefully did not create a post-mortem process, whereby they would only try to identify causes of failure.  Instead, they seek to review all missions, no matter the outcome.  They always look for opportunities to learn and improve.  Think about how demoralizing it is to be asked to participate in a post-mortem.  You are being labeled a failure in that situation, and you probably are fearful of the outcome of that analysis.  The U.S. Army tries to avoid that labeling, so that everyone is focused on how to get better, no matter the performance to date.  

Wednesday, February 09, 2022

The Fall of Peloton

Source: NPR
The Wall Street Journal reports today that Peloton CEO and co-founder John Foley is stepping down from the company.  The firm also announced 2,800 layoffs.  The newspaper reports on the precipitous decline in the company's fortunes over the past few months:

For a while Peloton enjoyed high times as a pandemic darling, with homebound customers ordering its exercise equipment and streaming its virtual classes. Its valuation soared. But its fortunes sagged as lockdowns eased and gyms started to fill up again. The company’s value had fallen from a high of around $50 billion roughly a year ago to around $8 billion last week.

I've watched the fitness industry closely over the past few years, ever since I wrote a strategic management case study about Planet Fitness.  As I have observed Peloton's struggles, I'm struck by three important themes.  

1. When I wrote the Planet Fitness case, I observed that fads have dominated the gym industry for years.  As a result, customers are quite fickle.  They become attracted to a new fitness concept, with high hopes of achieving various personal goals: stronger body, better cardio fitness, weight loss, etc.  Inevitably, many customers do not achieve their goals.  When that happens, what do they do?  Do customers blame themselves or the gym?  Of course, they tend to find fault with the gym, or the method, that they have been pursuing.  They seek a "better" alternative.  As a result, customers seem to migrate from fad to fad over the years.  Companies in industries with similar "fad-driven" demand need to stay carefully attuned to sudden shifts in consumer demand.  

2.  One of the most challenging elements of the fitness center industry structure is the highly attractive and plentiful substitutes.  What is the alternative to going to the gym?  Everything from working out at home or at the corporate/university gym to running outside to signing up for Jenny Craig or Weight Watchers.  Peloton, of course, is a substitute for going to the gym.  The threat of substitutes is high for firms in the  gym business.  Of course, the same goes for Peloton!  They face the same substitutes.  People can exercise outside, go to the gym, etc.  They have attractive, and in many cases, cheaper alternatives available.  Firms in all industries need to be attuned to the threat from substitutes.  Often, this threat is much more serious than the threat from direct competitors.  

3. Finally, Peloton is an example of a firm that may simply not be able to sustain the pandemic-driven demand surge as we move (hopefully) beyond the pandemic.  For all firms, the lesson is that they will have to closely monitor consumer behavior as we move beyond the omicron wave of the pandemic and toward more normalcy. If we move toward COVID being endemic, then consumer behavior may start to change in unpredictable ways. What has worked during the pandemic may no longer work as well in terms of attracting and serving and retaining customers. Companies will need to keep a close eye on changing patterns of consumer behavior as we move through these next phases of the pandemic. The key will be to not just survey customers, but to observe them and to empathize with them so as to understand their changing pain points and needs.

Thursday, February 03, 2022

Best Practices for Virtual Meetings

Two years into the pandemic, we have all become quite accustomed to virtual meetings.  For some of us, we feel as though our teams have improved their ability to communicate and collaborate virtually.  Others have encountered various frustrations and grappled with Zoom fatigue.  Recognizing these challenges, Kellogg School Professor Leigh Thompson has offered us three important recommendations for improving virtual meetings.   

1.  Work on engaging in constructive conflict with others.  Start with low-stakes situations and decisions, and use those discussions as an opportunity to build your team's capability to have thoughtful, productive, and positive debates.  Thompson explains in this excerpt from a Kellogg Insight article about her work: 

With fewer social interactions with our colleagues that allow us to constantly adjust and modify our communications, expressing disagreement virtually is more likely to go off the rails. And, in the absence of strong social cues and corresponding brain activity that is triggered by real human connection, we may feel less inhibited and be more likely to crack that snarky joke at a colleague’s expense. “People are not as nice when they’re communicating virtually,” says Thompson.

Even when intentions are good, misinterpretations abound. “Most people believe that they’re being hard on the problem, but the recipient feels that they’re being personally attacked,” says Thompson.

Add to this the reality that we cannot simply run down the hall or initiate an impromptu one-on-one conversation to clear up these misconceptions, and perhaps it is unsurprising that some teams overcorrect and avoid conflict at all costs.

But avoiding conflict altogether simply cannot be the solution. After all, some conflict is key to high performance. Thompson cites studies that find that a certain amount of task conflict is associated with higher creativity. For example, in one study of diversity in biotech labs, conflict was associated with more patents.

2.  Take advantage of the opportunity for creativity to flourish amidst a more level playing field.  Thompson notes, “Substance matters a heck of a lot more than style, virtually.  There is no head of the Zoom table.”  Use the technology to engage in brainstorming that is more effective than the usual group discussions that occur in person.  Ask people to write down their ideas in advance of the meeting and then share them with the group using a variety of virtual tools available.  I personally like the use of JamBoard by Google.  Breakout groups also can be very effective at stimulating creative problem solving.  

3.  Don't just stick to business.  Thompson explains the virtues of "small talk" in virtual meetings:

In one study—presciently conducted before the pandemic—Thompson and a Stanford colleague asked Kellogg MBA students to negotiate a fictional business deal with peers from Stanford in a remote environment (via email). But there was a twist: while some groups got straight to business, others were instructed to have a five-minute phone call, with the only rule being that they could not discuss the business matter. They were told to “schmooze,” says Thompson.

The results? The teams that schmoozed with their virtual negotiation partners were more likely to come to an agreement. These quick phone calls seemed to act as a virtual handshake, erasing some of the distance between teams by helping them see the humanity in one another.

For more from Professor Thompson, check out this webinar she delivered recently.