July 20, 2010

59) Levi’s

危 wēi  danger

I have always been slightly skeptical of established US & European fashion brands’ ability to succeed in emerging markets, after all the average income per person in China is around $3,500 and in India it’s $1,000.  Counterfeiting is rife and unlike super-premium brands they seem particularly vulnerable to low end disruption.  The Indian jeans market is no exception – home-grown companies such as Arvind Mills have addressed the low end market with huge success.  The company, founded in 1931, grew to be the fourth largest producer of denim for wholesale over the course of the following 60 years. It realized that India’s poorest couldn’t afford jeans and launched its own label – Ruf n Tuf – in 1995 to address the opportunity.  Its approach was to focus on the Indian consumers at ‘the bottom of the pyramid’, completely redesigning its business model with an emphasis on value.  Arvind Mills succeeded by selling a jeans kit to local tailors for $6/pair – minimal kit variants kept manufacturing costs low and the local tailors quickly became an effective marketing channel.   Subsequently the company has continued to innovate, adopting a full franchisee system for the manufacture and distribution of Ruf and Tuf jeans in 1995.

Surely the established jeans companies of the developed world, including Levi’s (the inventor of jeans) will be unable to service the ‘bottom of the pyramid’ and will be unable to compete, perpetually being disrupted by companies like Arvind Mills and being undermined by counterfeiting?

机 jī opportunity

Although the 1994 entry of Levi’s in India received a tepid response its fortunes have improved recently – it banks heavily on celebrity endorsement, product innovation and a superior retail experience to drive growth.  Most recently it has adopted an innovative “pay as you wear” model in India – the company offers cash-strapped Indians the opportunity to buy their jeans in three interest-free installments.  “A monthly installment scheme makes it easier for people to build their wardrobe with a premium brand like ours” says Shumone Chatterjee, MD of Levi’s in India.  The approach is smart – it enables more of India’s fashion conscious consumers to wear the Levi’s brand without eroding its brand equity or dropping its price points – although Levi’s will never completely straddle the pyramid it might manage to straddle a few more levels…

How About…

  • Defending your market position from disruptors using creative pricing?
  • Examining straddling the pyramid in emerging markets?
  • Empowering another part of the value chain to finish your products and services?

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July 13, 2010

58) Dropbox

危 wēi  danger

MIT-grad Drew Houston was frustrated with how often he forgot his USB drive.  He was sure that there was a better solution, probably a Web-based file hosting service but he couldn’t find one available so he founded Dropbox with a fellow MIT-Grad to build it.  Shortly after receiving seed financing from Y-Combinator in 2007 they released a short video explaining their plans on Hacker News – the video received 1200 Diggs and Houston realised that they must be onto something.  They built the product (which is worth checking out for its wonderfully simple UI here) and officially launched at 2008′s TechCrunch50, an annual technology conference.  Initial users loved the product so the next logical step seemed to be to advertise and they launched an Adwords affiliate programme.  The results were shockingly poor – customer acquisition cost proved to be $233-388 (for a $99 product).  Perhaps the company’s VC backed competitors were overspending and the company would never be able to compete?

机 jī opportunity

The team interpreted the situation differently – they didn’t see the cost of Adwords advertising as the problem, they concluded that their challenge was that consumers don’t search for problems that they don’t know they have.  In other words the team needed to find a way to create demand, not harvest it.  The team knew that users that were referred to the product invariably loved it so they developed a system to incentivise the referral process (gifting both the referrer and the new users free memory – a 2-sided incentive).  The approach worked: user numbers from Sept 2008 to Jan 2010 have increased from 100k to 4m, and 35% of these new users joined directly from the referral programme.

How About…

  • Questioning whether your aim is to create or harvest demand?
  • Using 2-sided incentives to drive sales?

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I like the low-fi introductory video (the only information on their homepage), it reflects the team’s humility and dives straight into the benefit using an analogous situation:

June 17, 2010

56) In-N-Out Burger

危 wēi  danger

In-N-Out burger is a chain of fast-food restaurants founded in 1948 in California.  The brand became famous for its limited menu and simple strategy that remains in use today: “Give customers the freshest, highest quality foods you can buy and provide them with friendly service in a sparkling clean environment.”  While scaling to 240 stores the company has stayed true to its vision – rejecting calls to franchise, leaving the simple menu unchanged and ensuring that it rewards its staff better than its competitors (it is one of the few fast food chains that pays more than state and federally-mandated minimum wage guidelines). And, to maintain freshness its locations are all within one day’s drive from its Baldwin Park distribution center. It’s great at what it does as evidenced by it consistently topping polls like this Zagat report. Given its rejection of growth through franchising and its inability to expand too far from its distribution center I have always thought its tiny menu might be its downfall. Surely its fans would become bored of the offer?

机 jī opportunity

My fears were allayed when traveling with a colleague recently.  On a road trip we visited In-N-Out, after choosing and ordering (very quickly given the lack of choice) I noticed that he ordered ‘off-menu’.  It turns out that In-N-Out has a ‘secret menu’ – this struck me as pretty smart because it allows its fans to make a wider choice and it drives word of mouth marketing.  I looked it up on the web and it turns out it’s not even that secret: when celebrity chef Gordon Ramsay appeared on The Hour, a Canadian TV talk show, he chose an animal style In-N-Out burger to be his “death-row” last meal.

How About…

  • Stripping your offer to its simplest version?
  • Developing a ‘secret’ offer for your best customers, making them feel privileged and deepening their affinity of your brand?

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and, just in case you’re interested (and out of the loop like me) here are some of the not-so-secret menu items:

June 2, 2010

54) Hotel Chocolat

危 wēi  danger

Hotel Chocolat, the upmarket confectioner, was founded by Angus Thirlwell and Peter Harris in 1993.  I’ve always been a fan – not least because the company has consistently turned its challenges to opportunity.  For example, when it struggled to maintain quality cocoa supply it bought an Estate (Rabot Estate in St Lucia) – this in turn became a phenomenal provenance story.  Or, when it couldn’t muscle its way into big retailers it direct sold through catalogue.  It also grew a Chocolate Tasting Club (a subscription service which currently has about 100,000 members) which has created a community of evangelists and made demand more predictable.

It’s a great business, since its launch 20 years ago it has been profitable every year bar one and has continued opening stores during the downturn.  The company has been self-financed to date but its recent successful US store launch has revealed the global potential.  It’s time to expand before competitors enter the local markets but surely the team will have to give up its 200% ownership to fund expansion?

机 jī opportunity

As always Hotel Chocolat has approached the problem creatively.  Instead of raising expensive equity or debt it announced a very different approach – the company plans to raise £5m by selling “chocolate bonds” to its most loyal customers, taking advantage of rock bottom interest rates.  The investment opportunity will be marketed to the members of Hotel Chocolat’s Tasting Club – ‘Investors’ can subscribe for a three-year, £2,000 bond, which will deliver a “tasting box” of chocolate worth about £18 every two months — equivalent to a 6.7% yield.   The money raised will help to expand the high street chain from 42 to 72 shops, enlarge the Huntingdon factory, develop a new cocoa plantation in St Lucia and expand the business overseas.  Angus Thirlwell, co-founder, said: “We would rather pay interest to our customers than a bank. Many who have money sitting in the bank getting a low interest rate may prefer to be paid in chocolate.” The company is on track to deliver a 20% rise in turnover to more than £50m this year.

How About…

  • Fundraising from less obvious sources, e.g. your most loyal customers?
  • Using the fundraising process to bring in a community of evangelists?

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May 17, 2010

52) McDonald’s

危 wēi  danger

Further to my post on Clover Food Labs last week a couple of my [few] readers have said to me that they love Ayr’s entrepreneurial approach but that it’s unrealistic for larger companies to perpetually prototype and iterate.  Their logic seems to be in line with that of the great Stanford Professor, James March who has argued that it’s incredibly difficult for organisations to simultaneously be explorative (searching for new opportunities) and exploitative (maximizing the payoff from existing opportunities).  With this in mind, shouldn’t large companies stick to building their ‘exploitative’ muscles – extracting value from their existing opportunities until that opportunity is exhausted and them move on to exploration again?

机 jī opportunity

I don’t think so, mainly because in fast-changing markets the exploration would come too late.  In his new book ‘The Design of Business’, Roger Martin makes an eloquent case for the discipline of ‘Design Thinking’ – an approach that we at IDEO use to tackle the challenges our clients present us with.  Rotman explains that design thinking “enables the organization to balance exploration and exploitation, invention of business and administration of business, and originality and mastery”. Perpetual prototyping is one tool used by the Design Thinker to enable simultaneous exploration and exploitation.  It strikes me that McDonalds is an example of a company that manages it – it prototypes relentlessly and it’s certainly big – according to Fast Food Nation, nearly one in eight workers in the U.S. have at some time been employed by McDonald’s.  It prototypes in store but also through the team of Dan Coudreaut, Director of Culinary Innovation. Ideas can come from those in his test kitchen or from franchisees or suppliers, and are prototyped initially in the full size store and kitchen at the head office.  This broad source of inspiration followed by prototyping enables them to trial around 1800 new products per year of which only a handful make it into the stores – but when they do they’re nearly always successful.  It also reduces the risk associated with launching new products by revealing the broader impact, for example Coudreaut tried a product called the McDouble Cruncher which was like a cheeseburger with barbecue sauce and onions. Although it was hugely popular when trialed the team observed that consumers stopped buying quarter-pounders (a core menu item) – not a good thing for margins so it was dropped.

How About…

  • Aiming to be simultaneously in explorative or exploitative phases?
  • Prototyping whatever your company size, increasing the number of ideas that you  can test and reducing the risk of failure?

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