Nokia, on the other hand made a wide variety of products, everything from tires to personal computers, all under the Nokia brand. But Nokia narrowed its focus to cellphones only, dropping all those other products. As a result, Nokia dominates the cellphone market with a 35% market share and is very profitable. Sales last year were $71.5 billion and net profit margin was 7.9%.
Motorola, on the other hand, is struggling. Sales last year were $31.1 billion and the company lost $4.2 billion.
A point you have made in your earlier books, which you make again in this book is that the first brand in a category goes on to dominate that category. How do explain the success of iPod, which wasn’t really the first MP3 player launched?
We try to make the case between the “first mover,” the first brand on the market and the “first minder,” the first brand into the mind. It doesn’t matter who was the first mover. The only thing that counts is who was the first minder. Apple was first in the mind with the iPod, not Creative Technology.
Furthermore, it’s a category issue. The iPod was first in the mind with the high-capacity MP3 player which could hold a thousand songs as compared with ordinary MP3 players which could hold only 20 or 30 songs. (The iPod had a hard disk drive which made all the difference.)
You also suggest that companies should avoid the mushy middle. Why do you say that? Every major airline in America is stuck in the mushy middle. They are not cheap like Southwest Airlines and they are not expensive either. (No airline that flies coach, business and first-class in the same plane can consider themselves to serving the luxury market.)
Southwest has been very successful at the low end and we believe that sooner or later, a new airline could be very successful at the high end. It’s the mushy middle that causes all the problems.
Consider General Motors. They don’t have a Hyundai at the low end and they don’t have a Lexus or a Mercedes-Benz at the high end. All their brands are stuck in the mushy middle and in deep trouble.
Why are big companies unable to launch successful new brands? Most of them end up buying good brands launched by others...
Big companies believe that you need a big advertising budget to launch a new brand. In America, a big company thinking about launching a new consumer brand believes it needs to spend at least $50 million in advertising the first year.
With this mindset, they don’t believe it’s worthwhile to launch a new brand until the market is big enough. Coca-Cola waited 13 years to launch a competitor to Red Bull, a brand of energy drink that grew very slowly. Coca-Cola’s product was called KMX which went nowhere.
We believe that new brands should be launched with PR, not advertising. Starbucks, for example, did very little advertising in its first years. (Less than $1 million a year for the first 10 years.)
Procter & Gamble has bought most of its brands rather than launch new brands. The company’s latest acquisition was Gillette.
At times big companies even end up killing new categories. Why is that?
Consumers are much more likely to perceive a new category if it has a different brand name than an existing category. Tylenol, for example, is perceived as a different category of product than aspirin.
Bayer, on the other hand, felt that it could use its powerful Bayer name if the category was perceived as a broad “pain reliever” category rather than two separate categories (aspirin and acetaminophen.) So they introduced Bayer acetaminophen under the general concept of pain reliever. But that didn’t work.
Eveready tried to do the same thing. Take their zinc-carbon battery leadership and expand it to include the alkaline battery category. That didn’t work either. The new category is now dominated by the Duracell line of alkaline-only batteries.
Both brands, however, missed an opportunity to create a new lithium category. Both Eveready (with their Energizer brand) and Duracell have line-extended into the lithium field.
‘You don’t make money building better products; you make money making better brands.’ Can you give us examples to substantiate that statement?
To substantiate that comment, study Consumer Reports. Invariably, the brands rated No 1 by the magazine are not No 1 in sales. Why is that so? Because consumers buy better brands, not better products. Consumers buy brands they think are the best, although Consumer Reports proves that this is very often not the case in reality.
Buick, along with Jaguar, was rated the most reliable vehicle on the market by the prestigious research firm J D Power, ahead of luxury brands like Lexus, Mercedes-Benz and BMW. Did that make consumers rush out to buy Buicks? No, it did not. Buick does not have the perception of high quality. Perception is more important than reality.
Buick was endorsed by Tiger Woods. Did that make consumers rush out to buy Buicks? No, it did not. That’s not believable (along with the J D Power research.) Consumers figure that anyone making $100 million a year is going to buy Rolls-Royces or Mercedes-Benzes or Ferraris.
As a matter of fact, Buick’s annual sales have fallen from 405,678 in 2000 to 137,197 last year.
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