Last to Market but Smart to Grow: Five principles of Late but Latest Entry

As the mid-year approaches, rumours of Samsung trying to be a month ahead of Apple with the respective new smartphones have started doing the rounds. Samsung is reportedly bracing to launch its latest generation Note 6 phablet ahead of Apple launching Apple 7 Plus phablet. First-to-market is a time tested strategy; it helps a firm capture market as it gets formed and take market share when no competitor is around. If the product is indeed a pioneering product and captures user imagination, it could become a monopoly and create formidable entry barriers to other manufacturers. On the other hand, if the product is poorly engineered it could help the follow-on players to improve upon their products and excel even more.

Being the first-to-market is not an easy task; it requires advanced engineering, smart manufacturing and agile marketing. The DNA of such firms tends to be unique. Over time, however, as technology becomes relatively more accessible, the market starts becoming more populated with several follow-on players. As market expands and firms are able to segment their markets based on unique features and combinations, the first-to-market concept could morph into first-to-market-segment concept. Not surprisingly, in a free market economy there would be firms wanting to enter an industry at all times. While it is easy to appreciate that the first-to-market company, and early followers will have the bulk of market share, what motivates firms to enter an industry despite being the last or near-last to enter is inexplicable.

Last-to-market

Being the first-to-market is measurable and understandable as a well merited aspiration. Being the last-to-market, however, is less measurable as it is difficult to forecast who else will join the late party. Being the last-to-market is also less understandable and tends to be arbitrary. For example, any share less than 1 percent could be one measure in one industry but even 5 percent may not be the right one for being the last company in the race. Any production level less than the minimum economical production quantity could be another measure. As costs keep coming down, the sustainable minimal production quantity and minimal viable market share could be coming down. Still, it could beat one’s imagination as to why a firm should, in a manner of speaking, be the 100^th firm to enter a market when the same effort could be expended to be in the first group of entrants in another field. There are, of course, valid reasons for the last-to-enter firms.   

For example, the industry itself could be so fragmented that there may not be much difference between the first-to-market and the last-to-market. Secondly, the entry barriers could be so low that there is enough scope for even marginal players to make an entry. Thirdly, there could so much outsourcing and contract manufacturing occurring in the industry that being the 100^th manufacturer could be infinitely easy. Fourthly, certain firms have resources that can be marginally deployed in easy-to-enter industries without big expectations. Fifthly, managerial mind-sets of operating in highly established market segments prompt such late stage entries. There are many examples with varied technological and marketing characteristics that confirm to the above criteria.  Examples are Indian formulations market, global smartphone market, Indian processed food market, and so on.

Turning the tables

Admittedly, a pioneering company has many strategic advantages which can be further sharpened to snuff out completion from late entrants. These include lowering of prices, cross-subsidization, differentiation, geographical expansion, locking up distribution channels, buying up retail spaces, aggressive advertising, product extensions, product innovations, market segmenting, sales discounts, service offerings, aggressive advertising and so on. As a result, the later one enters a market the smaller one’s market share could be, empirically. A 1995 study by Gurumurthy Kalyanaram and others in Marketing Science suggested that the new entrant’s forecasted market share divided by the first entrant’s market share equals, very roughly, one divided by the square root of order of entry of the new entrant. It is evident as a market gets crowded, the last entrant would have miniscule market share. Yet, empiricism may not always be the only guidepost.

In normal social life, we have countless stories of backbenchers in schools and colleges becoming top rankers as well as the poor and underprivileged reaching top careers. A combination of aspiration and optimism, diligence and commitment, grit and energy, knowledge and application, positioning and a bit of luck helps in such amazing accomplishments. Late entrants to industries and markets similarly have opportunities to prove their mettle and turn the tables on the incumbents. Admittedly, whatever ‘magic’ late entrants can spin the incumbents can also carry out with their superior resources and manage to maintain or expand their lead. However, performance is not always only a function of increasing size and scale. Incumbency also leads to complacency of invincibility while late entry is backed by the passion of the underdog to upstage the favourite!   

Late entrants

Late entrants are of two types. The first type is a well-endowed corporation which has decided to make a belated entry into an industry which is already catered to by the existing players. Entry of Reliance Jio into telecommunication services is an example. They have all the resources to use any of the pioneering advantages despite the late entry, and secure a market space. Such firms are not a subject of this blog post. The second type is a more humble entity or individual with just the necessary resources to make a modest entry. They may not have the resources to claim any of the advantages that large late entrants have but are skillful in securing a market hold. They typically would adopt the following five principles.

Smart outsourcing

Every company needs design, manufacturing and marketing capabilities to put a product into the market place. Typically, each of these takes 25 to 30 percent of total investment, aggregating to 75 to 90 percent, leaving 10 to 25 percent of the investment for other activities. A late entrant deploys smart outsourcing in as many areas as possible to reduce the typical investment to just a small proportion of what an integrated corporation would need. The smartest outsourcer would outsource all operations, close to 90 percent, and focus only on strategy and oversight. The typical outsourcer, however, may choose to invest in one of the three key areas, be it development, manufacturing or marketing, and strategy. Smart outsourcing requires smart selection of the outsourcing partner, and providing a compelling value creation to the partner to break into the market together.

Smart costing

It is not so well recognised that costing, and consequently pricing, can make or mar a product. Purist accountants who fully burden a product with all the functional, site and corporate overheads and management inefficiencies literally kill the new product. In a pioneering or first batch entry, there could be scope for recovery prior to market growth but for late entrants to mature markets, fully burdened costing is a sure way to defeat the very objective of entry. Strategists must realize that market toehold and market expansion are the fundamental requirements for a product to survive. It is necessary to secure an entry and expansion, even at a loss, to be able to recover later. Smart late entrants focus on smart costing and smart pricing, and in most cases carry their outsourcing partners along in this strategy.    

Smart differentiation

Differentiation is more common today than envisaged. Differentiation is confused with having variety. Having just a few products does not lessen differentiation (eg., as in the case of Apple) nor would a profusion of products provide differentiation (as in the case of Xiaomi, Huawei and Meizu). Oppo’s selfie phone with industry leading 16 MP front camera is an example of focused differentiation. Leveraging the scientific validation of Indian herbs and spices, a late entrant to the Indian masala product market could create new formulae for differentiation. An ice cream maker may capitalize on seasonality of fruits to develop seasonal special entries. Late entrants would need to focus on micro differentiation to make a smart entry.

Smart communication

While incumbents, pioneers or fast followers, may focus on aggressive advertisement, late entrants must focus on smart communication to be seen as providers of products which are qualitatively feature-rich, affordable and differentiated. Outsourcing helps the late entrants to assimilate the best of breed product features, from ingredients to packaging, and deliver them through multiple channels. Brand recall can be maximized with smart communication rather than just aggressive advertising. Out of several advertising campaigns, one normally recalls only those which convey a central message in a creative fashion. Airtel 4G advertisement, for example, says a lot without saying anything explicitly about the widest cellular coverage.

Smart organisation

In all cases, organization is important to secure and sustain market superiority. Late entrants, however, can bridge a lot of gap with an organization that is agile, flexible and adaptive with the right culture. Managers of a smart organization will have a first-hand feel for marketplace as well as manufacturing base. They should have a keen understanding of what makes customers switch brands and select outsourcing partnerships that provide such advantages. Smart organisation tends to be lean and non-corporate in structure and systems. Their relationships with product partners and retailing channels help the late entrants secure competitive advantage for the firm as a whole.

Scaling up

Late entrants certainly have a chance to enter a crowded market, and grow up with the smart formula discussed above. However, such firms have to contend with the fact that the incumbents are bound to hit back after experiencing the initial disequilibrium while even later entrants would try to replicate the success of the (earlier) late entrants. The challenge for reasonably successful late entrants is how they can move up to the next trajectory; solutions could emerge from external support systems rather than persist with the same success formula.

Simple successes lead to industry and private equity community taking notice. They are brought into a higher trajectory through mergers and acquisitions and/or external financing. The typical late entrant may thus gain huge power based on the late entry success but could become a typical incumbent through the step-up process. That would be a bit unfortunate for the firm but for the ecosystem it would be a benefit; as late entrants turn incumbents, new late entrants join the industry, keeping the ecosystem rich and bright.

Posted by Dr CB Rao on March 15, 2016

Indian Aviation Industry: Red or Redux for Strategic Competitive Analysis?

Jet Airways, India’s favorite private airliner, posted its largest quarterly loss (of USD 360 million) recently casting doubts on its ability to turnaround despite the sale of a sizeable equity stake to Etihad. Jet’s difficulties compound the loss making operations of India’s full fare national carrier, Air India on one hand, and the low cost private airliner SpiceJet on the other. Air India (together with Indian Airlines) has been operational from 1932 with 4000 daily flights to over 90 national and international destinations while Jet has been operational from 1993 with 3000 daily flights to nearly 80 destinations and SpiceJet has been operational from 1993 with 350 daily flights to 58 destinations. While there are other marginal players like GoAir and Air Costa, their position is not considered any better. The sad story of Kingfisher Airlines which once had a 20 percent market share and has since ceased operations last year , and is in serious debt repayment woes, continues to trouble investors and bankers. The net loss of the major loss making airliners of India has exceeded USD 1.2 billion in fiscal 2013. Cumulatively, the Indian aviation industry is reported to have lost over USD 8 billion over the last seven years and the industry debt has exceeded USD 13 billion. The only successful airliner in India seems to be IndiGo, a privately held operation (from 2006 with nearly 500 daily flights to 36 destinations). 

Green is red?

In this scenario of airliner industry being in scorching red, AirAsia India, with its striking red livery, has made its entry into the Indian aviation as a low cost airliner (as an Indian subsidiary of the highly successful Malaysian AirAsia). It has made a splash with the announcement of its inaugural flight from Bengaluru to Goa on June 12, 2014 at a tantalizing fare of Rs 999. It is believed that AirAsia would launch its additional flights also with such nano fares. In the Indian aviation industry, approximately, Air India has a market share of 20 percent, Jet at 22 percent, IndiGo at  29 percent and SpiceJet at 19 percent. Together these four airliners garner 90 percent of the Indian aviation market. Given the more or less equal division with three unprofitable and one profitable airliner, new entry is a risky proposition on the face of it. The existing airline players together are up in the arms against the green light to AirAsia; clearly they are apprehensive of the adverse competitive impact of a disruptive entry into the Indian skies.

Mittu Chandilya, the young and aggressive CEO of AirAsia India has said that theirs would be the only true low cost airliner in India while all others may try to gain shares on low fares. He implied in several forums that the existing airliners have their faulty or inefficient operational models rather than low fares to blame. He has also committed himself to enter the market with disruptive pricing but expressed confidence that the airline would breakeven in a few months due to intrinsically superior operating model. In a characteristic response Indigo offered the classic Indian formula of Re 1 fare even as SpiceJet has been on low promotional fares for quite some time. It is unclear, at this rate, as to where the operational and business models of the Indian airliners would lead to, and if the Indian aviation industry would be in a perpetual red zone. There are doubtless some differences, with established airliners like Air India,  Jet, SpiceJet and Indigo being both national and international  (in varying mixes of course) and AirAsia being a pure domestic play. The Indian aviation industry makes an excellent case for analyzing structure, strategy and competitive advantage of firms, in particular the relevance or otherwise of Porter’s theory of competitive strategy in multiple facets and the need for an alternative theory.

Industry analysis

Transportation industry is a consumer facing but highly infrastructure controlled, technology driven and investment intensive industry. The industry has to perforce operate through public (government owned) assets, be it roads, rail tracks, sea ports or airports. The Indian aviation industry reflects these characteristics in a distinctive manner; it is an oligopoly with a mix of public, private and overseas ownership. Airports are tending to get privatized, but not entirely and the skies are regulated. Aircraft makers are just two or three, and investment costs are huge. Aircraft turbine fuel bears huge import costs and duty elements and taxes dominate the fare structure. Air transportation is a highly technology intensive operation with compelling needs of rapid turnaround and uncompromising safety. It requires highly skilled workforce, be it pilots, maintenance engineers, flight crew or ground handlers. In most cases, the service an airliner can offer tends to be accentuated or attenuated by the quality of airports while even the lowest of fare is ballooned by tax components.

In terms of strategic framework, at one level the competitive forces seem stable. With only two aircraft builders with long delivery lead times but fiercely competitive between themselves, the bargaining power of suppliers is high but not prone to escalation. With capacity ahead of seats and occupancy factor being elastic with fare competitiveness the bargaining power of buyers is low but not compelling. With air transport being a favored requirement for business travelers and time-sensitive travels, the threat of substitutes is low but distance distorts the competitive force; the shorter the distance the greater the threat of alternate transport modes such as rail and road. Given the loss-making nature of the industry and the exits and consolidations that happened in the industry from time to time (East West, Sahara, ModiLuft, and Air Deccan) the threat of new entrants ought to be low but entry now and then (example, Kingfisher, GoAir, Air Costa and AirAsia) with disruptive operating models reflects that the threat of new entrants is real and the Indian aviation industry defies the Porter’s norm of industry attractiveness.

Industry rivalry, the fifth competitive force, is judged by the scale and scope of competitive responses of the players. In general fast moving consumer goods, electronic goods and white goods industries are known for high competitive intensity. Road transport in spite of the fragmented competition and rail transport by virtue of being a State monopoly do not engage themselves in intense competition. Air transport in India continuously fluctuates between cartelized high fares and disruptive promotional fares. Apart from boosting occupancy factor and market share, individual airliners do not have any other apparent reason for competitive behavior. Given that market share is gained at the expense of profitability in the Indian aviation industry, industry rivalry is intense. That being the case, the air traveler ought to have been the winner but apparently it is not so; poor connectivity, minimal options, high dynamic fares, long waits and bland service are the common refrains of domestic frequent fliers. International flights may offer better service but options tend to be few and expensive. Considering the five competitive forces, the Indian aviation industry refuses to be described adequately by the theory of competitive strategy.       

Need for a new model

The state of the Indian aviation industry, as discussed above, is reflective of an industry that has few degrees of freedom to control its destinies even though individual firms aspire to succeed. The industry’s logjam which cannot be removed by the entry of one or two overseas airliners as wholly owned subsidiaries or joint venture partners. The industry needs to work on a multilateral collaboration model to bring itself out of the logjam. The industry needs a model of collaborative advantage. The author in his blog post titled, “A New Theory of Generic Collaborative Strategy: Adding Value to Porter’s Generic Competitive Strategies, Strategy Musings, March 24, 2013 propounded an alternative but supplemental approach to industry analysis (http://cbrao2008.blogspot.in/search?q=A+new+Theory+of+generic+collaborative+strategy).

The blog post proposed in the generic collaborative strategy five collaborative value drivers. These are the values of co-integration, co-development, co-fulfillment, co-expansion, co-diversification and co-saturation. These value drivers are achieved collaboratively with suppliers, innovators, customers, new entrants and also all the players within the industry. By leveraging the collaborative value drivers, a firm can ensure competitive operations, optimized investments, innovative products and processes, enhanced consumer choice and larger market. As opposed to competitive strategy which seeks to increase the value of the firm on a relative basis at the cost of related as well as competing stakeholders, collaborative strategy drives up the value of the firm and its stakeholders simultaneously.  

The collaborative model is essential for the Indian aviation industry to come out of the woods. Co-integration would require development of a total air transportation value chain involving ground handlers, caterers, airport authorities, maintenance hangars, air travel booking agencies much as automobile industry works with its component suppliers and logistics providers. Co-development requires that current plans leverage current enablers and future enablers are developed to meet future plans.  Currently, the infrastructure at the Indian airports dictates the airliners’ fleet mix and route planning (apart from regulatory licenses); for example, the small runway length of certain airports rules out bigger aircraft such as Airbus A 320 while air traffic instrumentation dictates the landing hours. While airliners must advocate with government agencies to upgrade airports in all their facets, the airliners must also perforce work with a fleet mix that harmonizes with the available infrastructure.

Co-fulfillment requires that air transport must transform itself from the most economical alternative to the most preferred experience. That cannot come from mere hot food or cumulative mileage points. It comes from a belief that if one makes a booking with an airliner he or she would be provided with a total travel experience. In multi-sector travels, notably international or multi-city national, the originating airliner, for example, can offer the best option without insisting on total routing with only its aircraft or code-shared aircraft. The customer experience and loyalty that develop with sacrificing airline’s short term profits would be significant in the long term. Co-diversification would require acquiring potential technologies that could add competitive advantage to the operations. It could mean co-branding of debit and credit cards at one level or diversification into pre- and post-air travel logistics and travel portals on the other. Co-saturation would mean the ultimate collaborative strategy of networking with all agencies, public and private and central and state governments to completely saturate the Indian skies with network that covers all the cities and towns.  

Beyond the firm

It is understandable that every firm in the Indian aviation industry, be it the hallowed but loss making national carrier Air India, the favored Jet Airways, the avowed low cost airliner SpiceJet,  the profitable IndiGo or the disruptive startup AirAsia, is focused on advancing the respective airliner level occupancy factors and revenue parameters. However, the industry scenario offers few real degrees of freedom to any individual airliner. AirAsia would probably do well to play for the long term consolidation rather than short term disruptive entry while others would do well to look at collaborative revival than competitive blockage of AirAsia.  A massive collaborative transformation of the entire aviation value map is called for. The industry needs to be reinforced and pulled out of the collective dire straits through multilateral development before the individual firms can be on a sustainable growth path. The Governments and the private firms need to work together to find a lasting solution through the collaborative format discussed herein.

Posted by Dr CB Rao on June 1, 2014

Differentiation versus De-commoditization: Strategies for Haves and Have-nots

Differentiation is seen as a value building, remunerative strategy in product and business development. Differentiation as a strategy evolves along with industry structure. When an industry is built around a first time pioneering monopoly product, differentiation is of academic interest as the product constitutes the entire industry. As new players with identical or similar products enter the industry, differentiation emerges as the differentiator amongst different firms. However, when competition reaches a saturation point, the feasibility of differentiation declines even as the importance for cost leadership climbs up. Popularly, when competition becomes intense and differentiation becomes difficult, a product is seen as a commodity product. As an axiom, differentiation tends to be inversely correlated with commoditization, and vice versa. Yet, firms with investible resources tend to pursue differentiation as a premium strategy even in commoditized industries.

Differentiation tends to be primarily on product technology. In certain cases, it can be in terms of branding, channel marketing and point of sale strategies. Technology-driven differentiation tends to be more robust and sustainable relative to other forms of differentiation. Firms can seek to be differentiated not only by offering highly unique products but also offering a diverse range of products. In many cases, single product differentiation becomes vulnerable and firms are forced to field a broad range of products to meet multiple consumer needs. There was a time when Maruti-Suzuki held almost 100 percent of the Indian car market with only one product, the 800cc car. Yet, its dependence on small cars coupled with entry of other global car manufacturers in India led Maruti-Suzuki cede 50 percent of its share to competition. Diversity for a firm leads to differentiation of sorts. Diversity does not, however, stop commoditization. Many analysts equate with commoditization with genericization, and vice versa. This, however, is not necessarily true.

Commodity

In strategic discourse, commoditization is a concept that is used rather extensively as a driver or outcome of competition. Compared to innovation, commoditization figures more prominently as an inevitable concomitant of a developing industry structure. Many analysts suggest that commoditization is a direct consequence of lack of competition on one hand and excess of competition on the other hand. It is now hypothesized that no industry, however technologically advanced it is, can escape commoditization. For example, unbridled competition in smart phones is making the high-technology products look like commodity products, freely available off-shelf; a proof that no product group can escape the specter of commoditization. However, commoditization is not just related to competition.  Understanding the theorem of commoditization in strategic parlance requires the understanding of the word itself. Common words often get layered with folklore especially in strategic discourse!

Simply put, commodity is a raw material or a product that can be bought and sold. Some analysts believe that materials that do not have differentiating characteristics are free commodities. Some others believe that even when no differentiation exists, the demand-supply equation determines if certain products are precious commodities. Some commodities like oil, gold and water, which are non-renewable natural resources in varying degrees, tend to be precious while some like grains and metals whose production can be stimulated tend to be more freely available commodities. Some believe that products and materials that are nature’s gift are commodities while products and materials that are worked by human design and manufacture are considered non-commodities. Even this approach does not work because a product of great human effort like steel is often considered a commodity. In a sense, there is no straight correlation, in any combination, between natural occurrence, human development, preciousness, differentiation that can define commoditization.   

Commoditized shakeout

Commoditization is a resultant of a number of factors: abundant natural availability, ready usability, shared characteristics, surfeit of capacity, basal need fulfillment and so on. Any product, even if reflecting the highest level of human ingenuity, can become commoditized with time. Any commodity could also turn precious and differentiated if it ceases to be naturally available, gold for example. A commodity could become differentiated if it can be worked on to imbue special characteristics, diamonds that are cut uniquely for example. If a commodity like oil can be developed to reduce friction and reduce pollutants it becomes differentiated. When first introduced, a mutual fund instrument could have been very special but today it is completely undifferentiated and commoditized. The same with a special lending instrument like housing finance. It was made differentiated with a specially established institution, Housing Development Finance Corporation but with all the banks treating housing finance as a key component of their lending portfolio the instrument has become commoditized.

Commoditization is a concomitant of two principal factors: easy availability of materials and easy availability of technologies. Together, they determine the height of entry barriers to an industry. When faced with this, the first response of the firms and industry is to drive down the entry barriers even more, almost to a level of a shakeout in the industry. Emerging markets such as India are particularly prone to the phenomenon of commoditized shakeouts. Several industries, as diverse as motor pumps, lubricating oils, airlines, television channels, home foods and bulk drugs, to quote a few are witness to the commoditized shakeout phenomenon. The strategy adopted by most firms, when faced with commoditization, is to seek cost leadership to avoid being the victims of shakeout. This strategy has clear a floor level of cost-price below which it cannot be pursued, except at the risk of self-annihilation. The ideal strategy to address this is to have differentiated products all across the firms but it is easier said than done. As mentioned earlier, only a few firms which possess high technology and resources can hope to pursue differentiation in the face of commoditization (the “Haves”). If differentiation is for the Haves, the Have-nots need a relevant strategy; this blog post proposes de-commoditization as a novel strategy for the Have-nots.   

Differentiation for the Haves

Differentiation is not a mere function of financial resources. It requires visionary ideation and smart strategizing. Technology that continually fulfills higher levels of needs helps in differentiation. Basic human needs of communication and socialization are continuously expressed through different levels of technology, from the early telegraphy to modern day satellite communication. Socialization has kept pace with communication technologies but have essentially utilized the communication portals and cloud infrastructure. Future technologies could be extensions of human intellectual and physical activities. Socialization can take the reverse route to induct robots as part of everyday life. These kinds of differentiation requires two types of Haves, having technological innovation as the first core competency and customer outreach as the second core competency.

The possession of these core competencies enables firms to continuously innovate new products that fulfill the human needs in completely different manners. Those who utilize the core competencies to undertake only incremental innovations cannot achieve true differentiation; on the other hand, they deliver small incremental improvements through high levels of technology, leading to adverse cost-value relationships. Those firms which have true technological and market competencies are truly firms of destiny for industry evolution. While the pioneers qualify almost naturally for the differentiator role (for example, Cadbury’s in milk chocolates, Danone in dairy products, Kellogg’s in breakfast cereals), time to time new differentiators emerge (for example, Nestle with KitKat). The Haves should rightfully concentrate utilizing their core competencies to setting newer product trajectories. Given that this requires huge investments, the Have-nots would need a different approach.

De-commoditization for the Have-nots

De-commoditization at one level is responsible business management. It avoids trivializing a product through self-destructing strategies. Launch of a new product at a huge price premium but immediately offering buybacks and cash-back discounts trivializes technologies and products. The first step towards commoditization is an almost unintended consequence of volume-driven marketing or cost reductions. The right strategy of de-commoditization is to hold, and if possible even reinforce, product specifications all through introduction and growth phases of the product life cycle, even in the face of new competition. The second step in de-commoditization is to avoid frivolous market segmentation. While offering products at different value points is inescapable, mindless jumbling up of specifications for driving up product proliferation adds to commoditization. The right strategy of de-commoditization is to keep the product lineup simple and meaningful.

The next challenge of de-commoditization arises when the inevitability of commoditization happens. De-commoditization can happen in one of three ways. The first is by building value adding features in a commoditized product (for example, extending a yogurt product in two directions of low-fat range and high-energy range). The second is modifying a product to deliver two principal functions in place of one principal function (for example, making a gaming device like Kinetic that helps gaming as well as exercising). The third is retro-designing a product to rediscover the roots (for example, bringing smart watch technologies to conventional Swiss watches). De-commoditization requires a disciplined Kaizen mindset that upholds a product’s value in the eyes and heart of the consumer always. It will not require the mega investments that the Haves splurge on differentiation drivers but will certainly need a keen eye for detail and a penchant for simplicity and functionality in a mindset of quality.

Posted by Dr CB Rao on April 6, 2014                            

       

Products (or services) and Firms: The Five Immutable Laws of Emotive Brand Loyalty

Normally, I do not post immediate sequels to my blog posts. However, the comments of my good friend and respected colleague, Dr Ganesh Nayak on my last week’s blog post, “Products, Brands and the Firm: The Five Immutable Laws of Branding”, Strategy Musings, February 16, 2014 (http://cbrao2008.blogspot.in/2014/02/products-brands-and-firm-five-immutable.html) have set me thinking on the emotional facets of branding. I believe I should not only clarify certain aspects of the previous blog post but also benefit from Dr Nayak’s thoughts to cover certain additional aspects through this blog post. As readers may recall, the previous blog post postulated that six attributes of a product or service, functionality, reliability, durability, maintainability, affordability and differentiability, result in sustainable branding. Dr Nayak rightly commented that important as these points are, a brand is beyond these points.

Dr Nayak mentions that the many of the six points are tangible which a customer can experience in many “me too” products as well. He points out that a premium sedan such as Nissan Teana may have all the six features to a rational mind but the said car as a brand may not be as powerful as BMW or Mercedes is. He follows up that a brand is more of emotions, as a result of which the customer does not think of critically evaluating the above six points in respect of a product under the brand; the customer takes the presence of the factors granted. He refers to Mont Blanc pen not necessarily scoring high on all the six factors but customers willing to spend a fortune to acquire one. Acknowledging the meaningful insights that Dr Ganesh Nayak brings but also reviewing Dr Nayak’s points objectively, it is clear to me that Dr Nayak’s insights point to the need to supplement my previous blog post by developing  appropriate constructs for the emotive aspects of branding.

Emotions and loyalty

Emotions are strong feelings, and are characterized by positive ones such as respect, love and attachment, and negative ones such as anger, fear and hatred. Emotions are considered to be independent of rational thought. An emotive act or product causes people to feel strong emotions. A strong brand, without doubt, is based on, and is capable of, evoking strong emotions. When Nokia decided to sell its Lumia smart phone business several people responded more emotionally than analytically; the emotions were feelings of sadness that it marked the end of a historic Finnish brand, rather than feelings of optimism that a new owner with deep pockets and an emerging mobile operating system would infuse new life. The latter was probably based on negative emotions that Microsoft could not yet make a success of computing devices and, in addition, a concern that Microsoft Windows would never be an OS platform that can revive and ramp up Lumia. Clearly, future is somewhat imperfectly but popularly prejudged on the basis of emotions rather than rational thought.

At the same time, in spite of Nokia trailing other firms and brands in product features and customer acceptance, millions of Nokia handsets continue to be sold globally, the reason being brand loyalty. Loyalty, as we know, is the quality of being faithful in support of someone or something. Like emotions, loyalty is also not necessarily based on rational thought but at the same time has necessarily a history of the customer benefitting from the product or service in terms of the six factors in the past. Emotions and loyalty reinforce or erode each other contextually. The objective of all marketing generally, and advertising specifically, is to cause positive emotions and build brand loyalty. That said, it is to be realized that both emotions and loyalty cannot materialize in thin air, and on the other hand require a record of past performance based on the postulated six factors. This blog post postulates five immutable laws of emotive brand loyalty to deepen the understanding of these processes.

The first law: An emotive brand is “product plus trust”

Certain products and firms evoke trust; a belief and an assurance that they reflect quality, dependability, goodness, service and ethics. The trust typically develops from a firm and its products consistently scoring well on the six attributes. Over time, successful firms and products get branded positively, or negatively, predominantly on a singular dimension. For example, certain firms and groups get known for ethical conduct. Certain others get known for consistently high quality of its products. Certain service providers get known for their timeliness while some others get negatively branded for their erratic schedules. Consistent delivery on product attributes leads to brand equity and sustained brand equity leads to brand loyalty. The leading and lagging brands of the world have their instructive lessons on compliance to this law. 

The second law: Branding is "banking of emotions"

A firm has to provide products of quality to be a player of any standing in an industry. Yet, some firms and their products gain a higher level of customer trust within an industry. This may be considered firm level aggregate branding. Once a firm achieves collective superiority in all of its products, occasional or isolated setbacks are taken in stride. For example, Toyota, the world’s leading manufacturer of automobiles had, two years ago, a series of product recalls in one of the most stringent markets of the world. Yet, the company could tide over the crisis rather comfortably, and even achieve higher sales in the year after. Apart from an unassailable reputation of quality, a humbled and focused response to addressing the quality concerns protected the Toyota brand. Branding is like a savings bank of emotions for the firm. The larger the account, the more secure is its future.

The third law: Firm branding is portable, product brand extendable

Firms which are fortunate to develop brands tend to be anxious to leverage the success of brands to drive success of new products. While doing so, firms tend to fritter away the opportunity by an inadequate appreciation of scope and limits for brand reformatting. As a principle, product branding can be extended in a product family but not portable across products. Any attempted portability across product lines could be suboptimal compared to develop distinctive line-specific brands. For example, Samsung could extend its Galaxy brand to all its smart phones but its porting to a camera lineup was not as successful. On the other hand, a firm which has high firm level brand equity can port its equity into new product lines. Conglomerates and firms with high brand equity are well positioned to achieve this. New firms of Tata and Reliance groups as well as new product lines of electronic giants are indicative of this.      

The fourth law: Low cost is never a high price for branding

Theories of marketing teach us that features with underlay of technology and overlay of luxury come with a price. Premium products demand higher price. That said, price competitiveness of a product, the other five attributes remaining the same, buys brand loyalty. A customer who prefers a Mercedes SUV to a Toyota Innova (also an SUV) typically has such preferences based more on the reputation of Mercedes as a luxury brand even if it is pricey. That said, the same customer who prefers the Mercedes SUV may not prefer a Land Rover SUV, despite Land Rover being better SUV brand because of the much higher price tag that a Land Rover has (Rs 2.5 crore versus Rs 1 crore of Mercedes). The practical application of the six attributes of functionality, reliability, durability, maintainability, affordability and differentiability varies from customer to customer based on the nature of the customer, the social and economic demographics and the product itself. Apart from the customer’s own preferences the overall social infrastructure influences brand acceptability.

The fifth law: Brand loyalty takes the vision of the viewer

Brand loyalty takes many forms. The reasons why a product, firm or brand commands loyalty varies from customer to customer. For someone who understands the entire spectrum of automobile industry, Toyota could be the most favored brand for its innovative accomplishments in manufacturing management, and not necessarily because of the quality of any particular model. For someone who understands aseptic practices, a hospital that has state-of-the-art aseptic practices could command respect while for many others the association of topnotch medical consultants could be the decider. It is for this reason that some brands, “super-brand” themselves to ensure higher brand loyalty. While Aquafina and Kenley mineral (pure) water brands command brand loyalty for purity, Evion and Himalayan evoke further connect with the emphasis on bottling at source of Alpines or Himalayas as the case may be.

Emotional connect

The relationship between a seller (the firm) and a buyer (the customer) is neither a selling relationship nor a purchasing relationship; it is one of human relationship. In an organization, for example, people may deliver  on performance and may get rewarded in terms of compensation, and teams may share bonuses amongst the members; however, unless there is an emotional connect or an empathetic rapport amongst the team members, the team may not be reaching the fullest potential. Even though a sales transaction between a seller and a buyer may be a onetime occurrence (or even a periodic occurrence in respect of retail transactions), the multi-factorial emotional feel of getting to know a brand, exercising a reasoned choice, being sold with care, actually experiencing the functionality and after-sales service care, and having options to upgrade to next generation products all add up to building the emotional connect around a product, firm and brand.

Wise companies, therefore, do not consider their responsibility fulfilled with delivery to the retail chain; they pursue a diligent and caring connect till the point of contact with the customer, at the time of potential sale and thereafter. While a firm cannot be present at all points of contact, the firm would choose associates and partners who are aligned with its own emotional code of connectivity. The emotive brand loyalty of a firm and its products is probably the most important determinant of sustainability in a hyper-competitive market. The emotive brand loyalty does, however, gets built on the foundations of the six fundamentals that characterize a product or service to the customer: functionality, reliability, durability, maintainability, affordability and differentiability.

Posted by Dr CB Rao on February 23, 2014