Tuesday, August 7, 2007

A Divine Right to Perpetual Success

Back in the 1980’s, Donald Katz wrote a book about the history of the Sears retail company. The book was titled The Big Store. In this book, Mr. Katz went into great detail about all of the successes and failures Sears has had throughout the years.

Katz tells a story in the book about one of the low points, when Sears was losing customers and having financial difficulties. A group of Sears executives got together to try to diagnose the problem and find a solution. One of the executives exclaimed that he knew what the problem was. I lost my copy of this book a long time ago, so I cannot quote it exactly, but what that executive said went something like this:

“The problem is that people have forgotten that we are Sears. If we can just remind them that we are Sears, then they will come back and shop us again. Sears represents Americana. Sears is a part of our American heritage. If people could just remember how great Sears is, they would come back.”

Apparently, to this executive, the problem with Sears was the stupidity of the customers. These customers had forgotten that Sears is a successful brand who deserved their patronage simply because it was Sears. People had forgotten that Americans are supposed to shop Sears because that is what Americans do.

Contrast this to the response to a blog called Brand Autopsy by John Moore. On March 21, 2007 John posed the question: If Sears went out of business tomorrow, would anybody care? Some of the responses were as follows:

“Miss Sears? I can't remember the last time I was in one of their stores. Sears was a regular stop for my parents while I was growing up in the 60's.”

“Going to Sears is like a trip to the museum. You get to experience the past permanently.”

“I gave up on Sears years ago.”

“Did anyone miss Roebuck all that much?”

The Sears executive in the story assumed that for some reason Sears deserved perpetual success. It was as if there had been a decree from heaven that people were supposed to always love Sears. If people stopped loving Sears, it was because they forgot that Sears had a divine right to always be successful. If people would only remember that Sears is a successful brand, then it would be successful again.

This executive made the fatal mistake of taking success for granted. He assumed that once a brand attains success, that success cannot be taken away—once successful, always successful.

Unfortunately, brands have to win their loyalty every day. Past victories do not ensure future victories. When developing strategies, do not take success for granted. Do not take your customers for granted. Future strategies need to incorporate tactics designed to continually make the brand relevant and desirable.

The second fatal mistake this executive made was to blame any failure on the customer, rather than the business or the executives. Remember, the customer is the one with the money. If they don’t like you, they will spend the money elsewhere. It is your responsibility to get them to spend it with you. If they spend it elsewhere, you have to take the blame. If you take the approach to failure as “My strategy was perfect, it was the customer who was flawed,” then you are doomed to repeat that failure.

The principle here is that reputations are perishable. Just because you have a great reputation today does not mean that you will have a great reputation tomorrow. There are several ways that one can lose a great reputation:

1) You stop doing the things which gave you the great reputation in the first place, like great service or great prices.

2) The marketplace changes and customers start valuing something different. If you do not change with the times, your prior benefits can become less desirable or even obsolete.

3) A scandal or crisis causes people to lose faith in you.

4) You are providing the same level of benefits as before, which used to be the best available. But now someone has found a way to do the same thing better than you.

Because reputations are perishable, one can never take them for granted. Every strategy needs to deal with the question of how to ensure that customers continue to love you, in spite of all the changes in the environment. If you assume that customers will love you pretty much regardless of what you do, then your strategy can fall into the trap of “customer exploitation.”

Of course, you would never refer to a strategy as being rooted in customer exploitation, but many strategies end up being that way. Here’s how the process tends to go.

If you assume customers as a given, then your focus shifts to profits. The strategic question then becomes: How can you squeeze a little bit more profitability out of those customers? The answer tends to be through a combination of small modifications: raising prices, cutting service, cutting quality, etc. The subtle thinking in the back of the mind is that customers love us, so they will put up with a small about of these reductions to the overall value of the offering. In fact, we can even come up with a fancy name for it, called “brand premium.” In other words, our brand is so strong, that we can charge a premium. Or to say it another way, if the brand is strong enough, we can exploit our customers more.

Yes, there is some truth to the power of a brand. But that power can evaporate if we exploit the customer too much. Back in the 1960s and 1970s, Schlitz was one of the top selling beers in the United States. Even as late as 1976, it was the #2 brand in the country. But the Schlitz company started taking its success and its customers for granted. Instead of worrying about its customers, it looked for ways to squeeze more profits out of what they assumed to be a guaranteed perpetual flow of business forever.

To improve profitability, Schlitz found a less expensive way to make beer. Unfortunately, this process had the negative side effect of making the beer taste less desirable. Although people had loved the Schlitz brand in the past, they did not care for the inferior taste of the new beer made with the cheaper process. The love was lost. They abandoned the beer in droves. Today, Schlitz is a minor factor in the industry, made in small quantities by Pabst.

So what do I think was the principle factor behind the decline of the Sears brand? Back at the height of the Sears success (in the 1950s and 1960s), the US had Fair Trade laws. These laws made it illegal for a retailer to sell a product below the retail price suggested by the manufacturer of the product. If you were a retailer selling name brand products, you could never really get a price advantage over the competition. By law, you were constrained to price parity.

This is where the genius of Sears came in. Sears developed its own lines of products under its own brand names, like Kenmore and Craftsman. They positioned them to be every bit as good as the brand name products. However, because Sears owned the brands, it could charge whatever price it wanted. It was not restricted by the Fair Trade laws. Therefore, it priced its brands to always be below the fair trade price on the equivalent brand named goods.

In essence, Sears was the Wal-Mart of the 1950s and 1960s. It owned the reputation for “always low prices.” The laws of the United States almost guaranteed that Sears would be lowest priced alternative.

However, the Fair Trade laws started being abolished in the late 1960s/early 1970s. Suddenly, Sears was no longer guaranteed to have the lowest prices. Department Stores and Big-box specialty stores could now underprice the Sears private label with the often more desirable brand names. In fact, the repeal of the Fair Trade laws helped spur the rapid growth of discount department stores, like K Mart and Wal-Mart.

The reason people had loved Sears (lowest prices) vaporized. Sears was no longer the “Wal-Mart” of their time. Now Wal-Mart was the Wal-Mart of their time. Because Sears did not understand why people used to love them, they had no idea why people stopped loving them when the environment changed.

When Sears lost its original reason for success, it needed to do one of two things with its strategy. Either it needed reinvent itself so that it could hold onto its lowest price reputation (in other words, morph into a discount store like Wal-Mart), or find a new position as desirable as the old one (which they have never found).

It is not the customer’s fault that Sears is not doing well. The customer did not forget what made Sears great. Sears failed to understand the impact that Fair Trade laws had on their success, and so it misread the impact when those laws were lifted. The Sears strategy never found a new reason for customers to love them, because the company was apparently not aware that it even needed a new reason for people to love them. They thought “Americana” was enough. Sadly, it was not.

There is no such thing as a perpetual divine right to success. Customers love you for a reason. Things can change, causing that reason to no longer apply. Therefore, strategic processes must always have at their core a reassessment to ensure that the company continues to have a desirable and winnable position in the hearts of their customers. Otherwise, you can take the customer for granted and increase your exploitation of them until they eventually leave.

During this same time period (the 1960s/70s), Kresge could see what was going on in the environment and morphed itself from being a variety store chain (S.S. Kresge) into being the leading discount store chain (K Mart). Sears could have done the same. It is their own fault that they did not.

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