StrategyStreet Blog:

The 2010 American Customer Satisfaction Index E-Business Report is out. The report is the product of the research firm ForeSee Results. The research firm uses data provided by the University of Michigan. Analysts argue that the report should sound an alarm for Google and Facebook, two of the web’s most popular sites. Apparently, the companies are not doing as good a job as they have in the past with privacy policies and ease of use of their web sites. The report’s scores are set so that a score under 70 is considered poor. Facebook gets a rating of 64, despite the fact that it is the largest and fastest growing social networking service in the U.S. Google gets a rating of 80. This rating is down from 86 a year ago. What are we to make of this?

Not much.

In our StrategyStreet analytical framework, a customer subjects a potential supplier to two levels of elimination: invitation and evaluation. With “invitation”, the customer decides who he will spend any time considering in the purchase decision. In “evaluation”, the customer eliminates potential suppliers on its most important purchasing criteria. Then, the customer analyzes the remaining potential suppliers in detail in order to make his final choice. At both levels, the customer is looking to eliminate suppliers, not to choose one. (See the Perspective, “The Tallest Dwarf” on StrategyStreet.com.) In the final analysis, most buying decisions are the result of the elimination of all other competitors, rather than the positive choice of one of them.

Several years ago, BMW ran into a problem with its technologically advanced automobiles. It found that some customers were reluctant to buy their cars because the customers were concerned about the cost of maintaining products with such high technology. But BMW believed in its product and felt that the customer should believe equally. So, for more than the last ten years, BMW has offered free maintenance with its new cars. For four years, or 50,000 miles, a BMW customer will not pay for maintenance except for gas and tires. BMW continues to gain share and profitability in the North American market. (See “Audio Tip #160: How Do We Segment Customers by Emotional Needs?” on StrategyStreet.com.) Competitors have noticed.

In a tough, highly competitive market place, the avoidance of Failure and a company’s reputation for Reliability are critical to long term success. (See “Video #14: Definition of Reliability” on StrategyStreet.com.) Dell is an example.

A company has to send a consistent pricing message if it wants its customers to get its message. An example is Asda. Asda is the U.K. arm of Wal-Mart stores. Asda has always advertised itself as the home of “every day low prices.” It strayed from this message during the recession.

Here is an example where relatively small differences in price, in normally easy industries, have a big effect in the market.

Over the last year, the U.S. government spent $80 million to prop up General Motors and Chrysler. The intent was to save millions of American manufacturing jobs. The benefits seem to be temporary, at best.

McKinsey research has found that only 10% of cost reduction programs sustain their results after three years. The problem seems to be overhead. Companies have exploited manufacturing efficiencies to reduce the cost of goods sold as a percentage of revenues by nearly 3% over the past decade. On the other hand, sales, general and administrative costs have remained about the same. The performance of sales, general and administrative SG&A costs is an example of dis-economies of scale.

Over the last few years, Allstate Corporation, the big insurer of homes and automobiles, has concentrated its management efforts on producing industry-leading profitability. Profits have increased but the stock price has gone nowhere. And Allstate is losing market share.

The pharmaceutical industry has taken steps in the last few years to reduce the cost of bringing a new drug to market. Pfizer has developed a novel approach.

A few forward-thinking retailers have adopted predictive analytics in their loyalty programs. Among the few to use this tool today are Sam’s Club, CVS and Kroger. These programs offer both Convenience and Price advantages to individual customers. It is a true break-through innovation.

The leader of the United Auto Workers is retiring. He is leaving a union under siege. By 2009, UAW membership was about half of the level of 1995. The union has hemorrhaged members as the big three domestic automobile producers have shrunk in market share, lost billions of dollars, and closed plants.

The last couple of years have been very tough on the hotel industry. Now, some of the mainline hotel companies are starting to recover, but the high-end hotels continue their prolonged suffering. A typical example are the Four Seasons hotels. Last year the occupancy rate at the chain’s hotels was below 60% and revenue per available room, a key measure of sales, fell 26%. There are 82 Four Seasons hotels. At least 12 of them reputedly are near the breaking point.

A short while ago, we wrote a blog about Radio Shack’s rebranding itself (See Blog HERE) as primarily a mobile product carrier. At the time, we predicted that Radio Shack would have a difficult time competing on Function with Best Buy. Though, it would be more Convenient than the average Best Buy. (See “Video #26: Example of the Customer Buying Hierarchy at Work” on StrategyStreet.com.)

The cable T.V. companies are the big dogs in the television industry. So far, no one has been able to unseat them, though they seem to be trying to unseat themselves. The cable industry is losing customers to satellite T.V. and phone companies entering the video market. The rate of these customer losses is significant.

China’s Anshan Iron and Steel Group has announced plans to invest in up to five new steel mills along with a U.S. domestic partner. The last time I looked, the U.S. was swimming in excess steel capacity. So why would this company enter the U.S. to add to an already over-supplied market? This is a political decision, not an economic one. Though, politics will obviously translate into dollars and cents eventually.

Illinois opened its electricity market for non-residential customers in 1999. In 2010, about 75% of the electric load for commercial and industrial customers is purchased through alternative suppliers. That deregulation was a big success.

Charles Schwab is the clear leader in the online brokerage world. While there have been hiccups in its development from a simple discount broker to a full-fledged online brokerage firm offering a range of products, the company has always maintained its leadership in the retail brokerage business. It focuses on the individual investor and, importantly, on investment advisors who manage retail customer accounts.

Starbucks is a high-end competitor in the fast food industry. We call these high-end competitors Performance Leaders (see “Audio Tip #82: Performance Leader Products and Companies” on StrategyStreet.com). As individuals, these Performance Leaders almost always have small market shares. Starbucks has 4% of the U.S. market for brewed coffee. As a group, Performance Leader market shares usually fall below 15% of a total market. Sometimes these Performance Leaders, following the allure of the volume in the mass market, create products to enter the mass market. We call the competitors who serve the mass market as their primary function Standard Leaders. Standard Leaders control the majority of most markets.

Every year I buy several things online. I don’t like to shop in stores because I usually need to buy only one thing. I hate to take the time to go to a store to buy just one item.

Wal-Mart has come to dominate the grocery industry by offering wide product choices and low prices in their 2700 super centers. The company today is the biggest of the industry’s Standard Leaders. (See “Audio Tip #181: Using Physical Measures to Control Costs” on StrategyStreet.com.) And because the company has a well earned reputation for low prices, it found new customers during the last recession.

RadioShack Corporation has re-imagined itself as a major seller of smart phones. In an effort to get past its old and dowdy image, it has rebranded itself as “The Shack.” Today, it devotes about half of its relatively small stores’ shelf space to smart phones. It offers phones for most of the major carriers, as well as the Apple iPhone. This re-imaging seems to be helping the company. Its sales and stock price are on the rise.

In a rapidly growing market, one growing faster than 15% a year in units, Function innovations tend to dominate market share movement. That is, Function innovations move more market share, on average, than do innovations in Reliability and Convenience. Often, the second major driver of market share movement in a fast-growing market is Price. Low prices and low-end competition often expand the market and cause significant market share shifts at the same time.

We have written several times about the Customer Buying Hierarchy. See some examples HERE, HERE and HERE. This Hierarchy holds that customers buy Function, Reliability, Convenience and Price, and in that order. Most people assume that new Functions or Features drive a great deal of market share change. In most industries, this is not the case. In a Hostile industry, it is not the case at all. I recently read of two industries who stress Function innovation today. One will succeed with this kind of innovation. The other will have, at best, fleeting success with it. Function innovations work best, and are sometimes critical to the success of a company, in high-growth and stable high-profit industries. (See the Perspective, “When to Compete on Features” on StrategyStreet.com.) They are much less helpful in a very tough Hostile industry.

The farm equipment industry is well known for the colors on the equipment of its major suppliers. Deere’s equipment is green, Caterpillar’s is yellow, and New Holland sports a blue color. Normally, customers are very loyal to the “colors” in the industry. This year, however, some customers are losing their green colorblindness. This loss of customer loyalty is coming as a result of a difficult trade-off Deere had to make. This loss of colorblindness also illustrates the way market share moves in many markets.

Whenever an industry finds itself in the enviable position of having freedom in pricing, it usually finds that competition emerges out of the woodwork, from the least expected places. In many cases, the companies in these industries don’t conceive of new competition really having much of a chance to emerge. If they do see competition, they usually dismiss that competition as incapable of offering real competition.

Monsanto is the dominant leader in the seed business. It has led in the development of genetically modified seeds for corn, soy beans and cotton. This spring, the company introduced new second generation versions of its herbicide tolerant soy bean line and its herbicide and pest resistant corn seed. The company expected to sell enough of the soy bean line to plant 8 to 10 million acres and enough of the corn line to plant 4 million acres. Instead, the farmers bought 6 million acres worth of the soy bean line and 3 million acres worth of the corn line. The overall demand for seeds was down somewhat due to the depressed economy, but DuPont’s Pioneer Hi-Bred seed line also gained share against Monsanto.

Over the last year, U.S. investors have pulled over $20 billion out of domestic stock funds and replaced these investments, in large part, with bond funds. Not every type of stock fund suffered, however. The February 2010 data illustrate this. Domestic stock funds, during that month, suffered $3.7 billion in withdrawals. On the other hand, international stock funds gained $4.6 billion. But the big winners were domestic Exchange Traded Equity Funds. They gained $4.8 billion. These ETFs are attracting investors with their very low costs in management fees and superior tax efficiency over the average mutual fund. Their growth is also an indication that investors have become more price-sensitive than they have been in the past. (See the Symptom & Implication, “Customers are more price sensitive” on StrategyStreet.com.)

The German automakers are under some pressure. They need to have a small car in their product line-up in order to respond both to consumers’ growing preferences for smaller cars and to government pressures to reduce fuel consumption and carbon emissions. BMW has answered with its One series. Volkswagen has taken a 20% stake in Japan’s Suzuki Motor Corporation, which is a small car specialist. Mercedes Benz has decided to go an alliance route.

Dell is struggling to keep up with HP in the personal computer market. There is one part of the market, though, where Dell remains the clear leader, the small business market. Part of the reason for the company’s success in this market is its financing package. It is more generous with financial support than its competition. It may offer interest-free financing when companies purchase $25,000 or more of new computers. The company offers other creative financing deals. In one of these deals, a customer bought $30,000 of computers on a three-year lease plan that allows the customer to keep the equipment when the lease expires. Overall, Dell says that 22% of its small and medium-size business customers use Dell to finance their purchases. This 22% is up from 17% just two years ago. The company is gaining share by using its financing muscle, despite the chancy economic environment.

Southwest Airlines is an unusual competitor. Since its inception, the company has been a low-end, discount competitor. What makes it an odd duck is that it provides service levels equivalent to the industry’s large legacy carriers while it also has very low costs compared to the industry’s erstwhile leaders, such as Delta, United and American Airlines. Southwest enjoys this low cost structure because it is less encumbered by onerous union work rules. Southwest has unionized employees, but their work rules are less restrictive than are those of the legacy airlines. Southwest uses this low cost structure to reduce prices and gain share against their larger legacy competitors. This has been going on for long enough that Southwest really is approaching industry leader status, if it’s not there already. Surely flying Southwest has become nearly as convenient and comfortable as flying one of the legacy airlines. The service of the legacy airlines has come to the level of Southwest, rather than the other way around.

Big companies are pulling out of the petroleum refining industry. In the last year, Shell, Chevron, Valero and Sunoco have put refineries up for sale or shut them down. There is simply too much capacity in the industry. But there seems to be one guy coming in through the exit doors in the refining industry. Marathon Oil just opened a new $4 billion addition to its Louisiana refinery. Further, the company announced that it made a profit in all six of its other refineries in the U.S. in 2009. 2009 was a terrible year for the U.S. refinery business. 2010 isn’t much better.

Sweden is a small country with a proud tradition of producing tough, high-end, automobiles. We call these high-end products Performance Leaders. In a hostile market, a Performance Leader usually suffers from scale disadvantages compared to the much larger industry leaders, whom we call Standard Leaders. Often, these Performance Leaders become acquisitions for the industry’s Standard Leaders. (See the Symptom & Implication, “The industry is consolidating through mergers and acquisitions” on StrategyStreet.com.) That was the case when GM bought Saab and Ford bought Volvo.

Analysts widely expect that Apple will offer its popular iPhone through Verizon by the end of this year. In anticipation of the loss of its iPhone exclusivity, AT&T is busy upgrading its network in an attempt to retain its current customer base in the face of the prospective Verizon competition. This story provides a useful illustration of how winning and failing works in a marketplace.

Since the year 2000, medical care has increased in cost by 49%. Food is up 32%. But automobiles are flat and apparel is down 8%. Part of the reason for the better performance of automobiles and apparel has been the extreme stress of competition both of those industries have suffered. But the growth in the cost of medical care pales in comparison with the increased cost of college tuition and fees. That’s up 92% since 2000. (See the Symptom & Implication, “The industry has been able to preserve margins by increasing prices” on StrategyStreet.com.) All of this data comes by way of the Bureau of Labor Statistics.

There has been much press over the last few weeks about the problems in the Euro Zone. Most particularly, we have learned more than we may want to know about the problems of deficit spending in Greece, Spain, Ireland and Portugal. Just recently, though, we may have learned that the problem is not the deficit spending in those recessionary countries. No, the problem seems to be the Germans.

The majority of citizens go to banks for credit cards, loans and other day-to-day financial transactions. Over the last few years, the banks have easily pushed through significant fee increases in all of their services because most people deal only with one bank and are unlikely to want to go to the trouble to change banks to get lower prices. The result is that lower prices aren’t offered, at least not to the average citizen. (See the Symptom & Implication, “The industry has been able to preserve margins by increasing prices” on StrategyStreet.com.)

Boeing and Airbus have an interesting problem. These two companies had been sparring back and forth for several years in the large plane market. The industry’s largest customers, such as United and Republic Airways Holdings, are among the most important customers for the large planes and thus for Boeing and Airbus.

Recently, Wal-Mart found that it was losing some customers to competitors. After examining the reasons why, the company discovered that some of its customers were leaving because Wal-Mart had eliminated some of the products the customers were used to buying at Wal-Mart. This situation gives us the opportunity to look at the Customer Buying Hierarchy in a retail business.

The stats for the light vehicle sales in the U.S. during the month of February are out. Of course, Toyota’s sales shrank by nearly 9%. The surprising big winner was Ford, whose sales increased 43%, far more than anyone else. Its nearest competitor, Nissan, had a sales increase of 29%. GM’s sales increased by 12%. What may be driving this superb performance from Ford?

Several months ago, we wrote a blog (See Blog Here) that noted the capacity reductions in the airline industry. In particular, the large legacy airlines were reducing their capacity in order to raise industry pricing. At the time, this effort was showing relatively little help with industry pricing.

Nine months ago, Palm introduced its new Pre smart-phone. On the occasion of that introduction, we wrote a blog (See Blog Here) predicting that the Pre would have a difficult time competing in this fast-growing market. It’s problem? Lack of apps. At the time, Apple had 35,000 apps. That number has now grown to well over 100,000. Other competitors today have as many as 20,000 or more apps available. The Pre has relatively few. Its shortage of apps has shown up in its market share. Recently it had 5% of the smart-phone market, a long way behind Apple’s 18% and Blackberry’s 43%.

There is a price war going on in the retail liquor department. This is good news for those of us who enjoy a drink but bad news for the liquor companies.

We use the Customer Buying Hierarchy to evaluate many developments in a market. This Customer Buying Hierarchy argues that customers buy Function, Reliability, Convenience and Price, in that order, when making a purchase. The customer does not buy until he finds one company who can offer him a benefit in a category of interest to him that no other competitor can offer.

For years, the cable industry has bundled its channels into tiers. They create “buy-throughs” which require a customer to purchase more than one tier to get to a particular channel the customer may want. For example, if the customer would like to have a channel in the second tier, the customer must also purchase the first tier along with the second tier bundle, of course, at a higher price.

About a year ago, we wrote a blog about the leading ski resort in Northern California, Squaw Valley, emerging from a Leader’s Trap (see Blog here). We predicted at the time that Squaw Valley would gain market share quickly as a result of its change in pricing strategy. The preliminary results from this change in strategy are in. They are impressive.

It seems that retailers are often on the leading edge when it comes to innovation and creativity in their crafting offerings. They have an excellent sense of how their customers think.

The small consumer battery business is in the midst of a price war. The short-term losers in this war will be the industry leaders. But the longer term losers would be the low-end Price Leader competitors in the market.

After months of back and forth, Kraft Foods has now reached a firm agreement to buy Cadbury. This may be a good thing for Kraft. Warren Buffett demurs due to the price. The jury is out. However, this merger may not be good for some of the other competitors in the industry. (See the Symptom & Implication, “The industry is consolidating through mergers and acquisitions” on StrategyStreet.com.) In particular, some industry observers are pointing to the precarious position of Hershey. They note that Hershey will be a very small competitor in the global confectionary business. That may be, but I would not be so fast to write off Hershey’s chances of survival. Often the smaller firms are more profitable than the largest firms in the industry.

One of our local newspapers is running a series on the problems of public transportation in the San Francisco Bay Area. The problem seems to be that ridership is well off of plan. The economy, and its attendant reduction in jobs and squeeze on commuter pocketbooks, has reduced demand.

In 1960, the city of Chicago built McCormick Place. This facility was the first convention building built specifically to hold very large national conventions. McCormick Place put Chicago, as a convention center, on the map, where it stayed as one of the top convention destinations for the last fifty years. Now clouds gather on the horizon. Several large conventions have cancelled their Chicago venue and switched to other cities, like Las Vegas or Orlando. They site Chicago’s high cost and complex labor work rules (see “Video #9: Overcapacity and How it Develops”).

There are three primary reasons to make an acquisition. First, the acquirer may use the acquisition to reduce its cost by consolidating and reducing the total cost of overlapping cost functions. Second, the acquirer may seek to gain a new set of customers. And, third, the acquirer may be seeking a product capability which it does not have. In general, we believe that a successful acquisition will meet at least two out of these three criteria.

Our recession continues, but not every industry suffers in this recession. One industry that is not suffering today is the auto rental market. The average rental rate, at an airport, for a compact car in 2009 was up over 50% from that of 2008. This, while demand in 2009 fell 20%. What accounts for this surprising result of a price rise despite a fall-off in demand? Capacity reduction. (See “Audio Tip #116: The Withdrawal of Capacity to Raise Prices” on StrategyStreet.com.)

Wal-Mart stores and Costco Wholesale are disrupting markets again. The market they are disrupting today is the grocery industry. In truth, they have been disrupting the grocery industry for the last several years, to the point that Wal-Mart is now the largest grocery store company in the country. These two competitors drain their competition of their life blood by using low prices. The recession, along with the pressure applied by Wal-Mart and Costco, has reduced the consumer pricing index for food by nearly 3% over the last year.

Over the last few years, the exchange traded fund (ETF) business has exploded as the advantages of exchanged traded funds attract investors away from individuals picking stock or investing in mutual funds. (See Audio “Tip #1: Defining a Business” on StrategyStreet.com) The industry manages nearly three quarters of a trillion dollars in assets.

In early February, we did a blog on Abercrombie & Fitch and its Leader’s Trap (see blog Here). The company refused to lower its prices for fear of damaging its high-end, exclusive image. (See “Audio Tip #134: What are the Objectives of Our Pricing Policy?” on StrategyStreet.com.) The blog predicted that Abercrombie would have to lower its prices anyway.

Three of the largest book publishers have decided to delay the release of their most popular new books to the e-Book market. This is unlikely to be a successful experiment. But another experiment from a fourth publisher offers promise.

Times are tough for business in many industries. Demand is off, prices are falling, and competition is fierce. Some companies have responded to these difficult conditions by divorcing their high-cost customers. Is this a good idea?

When do we have to pay attention to low-end competitors? The cell phone operating system business gives us an indication.

Three of the leaders of the automobile industry are presenting some interesting new stories. First, General Motors. The new Chairman of General Motors is Edward Whitacre. He is not a car guy. He came from the telecommunications industry, most recently as Chief Executive at AT&T. The Chairman recently asked the head of engineering at GM to call all the customers who had turned in their new cars under a recent quality program. This program offered customers a 60 day money-back guarantee. It allowed a customer who was unhappy with his automobile to turn it back to GM for a full refund. The head of the engineering group charged with calling the new customers noted that the focus on customer satisfaction was new at GM…and long overdue. This is a hopeful development for GM.

For a year now the economy has weighed down passenger airline traffic. The industry expects a 4% reduction in passenger volume for 2009’s Thanksgiving season compared to the previous year. And, as demand has fallen, so have prices. Ticket prices this year are down 13% compared to 2008, so the industry is getting hit twice: by a fall-off in passenger seat miles flown, and by falling prices per seat mile. (See the Symptom & Implication “Demand in the industry is falling” on StrategyStreet.com.)

CVS Caremark is struggling. The Caremark side, which is a pharmacy-benefit manager, is bleeding losses and major customers. The company picked the wrong customers.

Some lucky companies have discovered ways to get other people to carry costs on their behalf. (See “Video #62: How to Improve a Cost Structure” on StrategyStreet.com.)

Every few years, Microsoft introduces a new version of its very popular Office product. The last version was Office 2007. The next will be Office 2010. As often happens with technology upgrade innovations, the new versions sometimes do not offer enough additional benefits to justify all the customers of the old version spending on the upgrade. Office 2003 attracted 60% of the existing Office customers when it came out. Current expectations are for Office 2007 to attract somewhere between 50% and 55% of existing Office users to upgrade. So, somewhere between 40% and 45% of the current Microsoft Office market will not upgrade to the next version.

The internet has given birth to another retail concept. A new set of retail start-ups specialize in discounted designer apparel. These web site based companies include Gilt.com, RueLaLa.com and HauteLook.com. These companies offer “private sales” to customers on a membership list. Each day the companies send an email offering “members only” sales on expensive designer goods. These goods are discounted heavily and are a year old, but these sites have been very popular. They are growing at a rate of over 20% a year. (See the Symptom & Implication “Small discounting competitors have gained a market toehold” on StrategyStreet.com.)

Part 2
Some hospitals, along with some health insurance companies, are using video technology to connect patients in outlying areas with specialists in urban centers. This video technology connects local and regional hospitals to large urban medical centers where most medical specialists practice medicine.

Some hospitals, along with some health insurance companies, are using video technology to connect patients in outlying areas with specialists in urban centers. This video technology connects local and regional hospitals to large urban medical centers where most medical specialists practice medicine.

Every price has at least two components: a set of performance benefits associated with the product and a unit price. The unit price is what we call the basis of the charge. This basis is the unit measure the company uses to quantify the price for the product. When you change the basis of charge, you usually change the effective price at the same time. Normally, the basis of the charge, or unit price, expresses a major cost that the supplier of the product incurs. A trucking company charges by weight. Lumber sells by dimension. Gasoline sells by a volume measure. Paper sells by weight.

Toys R Us has introduced a lay-away program for large ticket items that they sell. These items include bikes, dollhouses, play kitchens, car seats, cribs, strollers and other expensive items. This new program from Toys R Us follows successful similar initiatives by Sears and K-Mart last year.

There is a new, small, credit card issuing company in the market. The company is PartnersFirst and they promise to change the credit card world by making that world more cardholder friendly. This new firm, based in Wilmington, Delaware, has introduced an unusual credit card. The card has no fees and relatively low borrowing rates, along with less onerous penalties. The upstart company challenges the four giants in the industry, Bank of America, Citigroup, JP Morgan Chase and Capital One. Industry veterans formed and run this new credit card company. They believe that the company’s card should be particularly attractive in the light of new Federal rules that restrict credit card practices.

Part 1: Segments and Products

There is a new, small, credit card issuing company in the market. The company is PartnersFirst and they promised to change the credit card world by making that world more cardholder friendly. This new firm, based in Wilmington, Delaware, has introduced an unusual credit card. The card has no fees and relatively low borrowing rates, along with less onerous penalties. The upstart company challenges the four giants in the industry, Bank of America, Citigroup, JP Morgan Chase and Capital One. Industry veterans formed and run this new credit card company. They believe that the company’s card should be particularly attractive in the light of new Federal rules that restrict credit card practices.

The NFL is the most popular sports league in the country. For years, it has been able to increase its revenues by selling television time, licensed products, and even tickets to games. This easy market came to an end with this recession. Three quarters of the NFL clubs have held ticket prices flat this year. Even then, only twenty clubs sold out the tickets for their home games. So, ticket sales revenues are likely to drop this season.

Just a few years ago, Dell Computer was the darling of the PC industry. Hewlett-Packard was an also-ran. Today the tables have turned. Over the last year, Hewlett-Packard’s market share has jumped from 18.5% to 20% of the global PC shipments. Dell’s market share has fallen from 15.7% to 13.7%. The change in market share is customers saying that HP offers a better value proposition. (See the Perspective, “The Two Best Consultants in the World” on StrategyStreet.com.)

The late 80’s and 90’s were hostile times for the beer industry. The period saw constant price wars. All the domestic competitors, except for Anheuser Busch, suffered from relatively low returns. A hostile industry is notable for constant pricing pressure and very low returns in the industry. The brewing industry certainly fit that description for a long period of time.

Those of us who fly a lot have noticed how few people have a meal on an airplane anymore. In flight food was attractive when we got it for free, much less so when we have to pay for it.

Do you know what a Hyundai is? How about a Kia? Of course you do. They are South Korean automakers. Though they are not top of the consumer mind in the U.S., they are a rising pair. They both belong to the Hyundai-Kia Automotive Group. Globally, this automotive group is the fourth largest automaker. Toyota, General Motors and Volkswagen rank ahead of them. And the South Korean Group is gaining share at a rapid rate. Ten years ago it was the eleventh largest global automaker.

Toys R Us has created the “Great Trade-In” event. This event offers consumers who bring used cribs, car seats or other baby products into a Babies R Us or Toys R Us location a 20% discount on any new product from selected manufacturers in the store.

After several years of extreme drought in Israel, the prophet Elijah sent his servant to look on the horizon for a cloud. The servant returned to say that he had seen a cloud on the horizon but it was as small as a man’s hand. However, in short order, that little cloud turned into a deluge and ended the drought in Israel. This story had a happy ending. There is a small cloud on the horizon for consumer goods that may not have such a happy ending. The retail market share of consumer goods is falling, while that of private labels is growing.

The U.S. online video ad market is growing at 30% a year. Still, it is just a small fraction of total U.S. T.V. advertising spending. The leader in the online market is Hulu. GE’s NBC Universal, News Corporation, and Walt Disney are Hulu’s owners. Hulu and some other video sites provide free professionally-produced videos from its investors. Hulu exists on an advertising business model. Hulu will place one or two thirty-second ad spots during a few commercial breaks for hour-long shows.

China has adopted an interesting plan to reduce the rate of cost it pays for the metals and ores it purchases.

The snow skiing season is still a few months away. Still, in preparation for the upcoming season, the ski equipment promotions are underway. One of my favorites comes from Granite Chief. This is a fine retailer of ski equipment in Truckee, California. Each year, the company makes an offer to its customers: Purchase your Ski Service Card by August 31st for $100 and you will have a credit balance for $200 to be used on any of the company’s repair, mounting, tuning and boot-fitting services. Each time the card holder has equipment serviced by the store, Granite Chief will deduct the labor cost from the customer’s Ski Service Card credit. The credit is good only for labor. Any unused balances are not refundable and will not be carried over to the next season. The card expires on May 31, 2010.

Amazon and its Kindle products have had the eBook market to themselves since the market began taking off a couple of years ago. The eBook market is now starting to grow fairly fast. Sony has decided to grab some of that growth.

Sony has just introduced a new PlayStation3. This product comes in a new slim form factor. Its price is $299. This is a 25% reduction from the $399 price of the current model of the PlayStation3. The price cut comes as the PS3 has struggled against its competitors, whose products have carried lower prices. Sony was in a Leader’s Trap.

In the bleak economy in the first half of 2009, coupon redemption rose 19% compared to the same period in 2008. Even the largest Price Leaders (see Audio Tip #83: Price Leader Products and Companies on StrategyStreet.com) have had to go along with this development. The three largest discount clubs, Costco Warehouse, Sam’s Club and BJ’s Wholesale Club have increased their couponing to club members. (See Audio Tip #120: Using Low Price to Gain Share in Hostile Markets.)

Nokia is an industry Standard Leader who struggles at the high end of the market.

There were a number of articles regarding pricing over the last few days that caught my attention. Whenever a market gets difficult, many competitors, but especially the leaders, can become confused about what to do with their prices. Here are some examples of both effective and ineffective pricing decisions.

Corporations have just completed the latest quarterly profit reports for publicly traded companies. Two-thirds of the publicly traded companies beat their forecast profits. Many of these companies failed to reach their forecast revenue numbers, but still reached their profit targets, or better, by reducing their costs. Since there is so much focus on the power of cost reduction in today’s margin environment, I thought it would be interesting to review the ways that a company can reduce its unit costs. To make it more interesting, I decided to use stories that I have seen over the last week in order to illustrate these techniques.

Corporations have just completed the latest quarterly profit reports for publicly traded companies. Two-thirds of the publicly traded companies beat their forecast profits. Many of these companies failed to reach their forecast revenue numbers, but still reached their profit targets, or better, by reducing their costs. Since there is so much focus on the power of cost reduction in today’s margin environment, I thought it would be interesting to review the ways that a company can reduce its unit costs. To make it more interesting, I decided to use stories that I have seen over the last week in order to illustrate these techniques.

Corporations have just completed the latest quarterly profit reports for publicly traded companies. Two-thirds of the publicly traded companies beat their forecast profits. Many of these companies failed to reach their forecast revenue numbers, but still reached their profit targets, or better, by reducing their costs. Since there is so much focus on the power of cost reduction in today’s margin environment, I thought it would be interesting to review the ways that a company can reduce its unit costs. To make it more interesting, I decided to use stories that I have seen over the last week in order to illustrate these techniques.

Corporations have just completed the latest quarterly profit reports for publicly traded companies. Two-thirds of the publicly traded companies beat their forecast profits. Many of these companies failed to reach their forecast revenue numbers, but still reached their profit targets, or better, by reducing their costs. Since there is so much focus on the power of cost reduction in today’s margin environment, I thought it would be interesting to review the ways that a company can reduce its unit costs. To make it more interesting, I decided to use stories that I have seen over the last week in order to illustrate these techniques.

There are a hundred thousand job sites in the U.S. and abroad. These sites charge employers to post jobs on their web sites in order to attract qualified employees. The big three in the market include Monster, CareerBuilder and Yahoo!HotJobs. With unemployment rising world-wide, these job sites are still growing. However, they are losing market share to emerging alternatives.

The legal industry is suffering just like the rest of us in this economy. Interestingly, not all legal firms are suffering. The firms that are suffering the most are the large firms, who have done well for many years. These firms typically bill their large clients between $700 and $800 an hour for legal work. They have more than 200 lawyers in the firm. The next tier down sees law firms with 200 or fewer lawyers. These firms typically bill clients between $200 and $500 an hour for work done by their senior partners. Overall, the smaller firms seem to be about 25% cheaper than their larger cousins. These smaller firms are actually growing in this economy. While their larger brethren are laying off lawyers, the small to medium sized firms are hiring today. (See Video #6: Competition and Low-Cost Expansion on StrategyStreet.com.)

Over the last fifteen years, the number of items offered in the typical grocery store has increased by over 50%. Customers are beginning to be confused by the number of choices offered at the grocery store. This proliferation of consumer choices is a retail-wide phenomenon. Consumer goods manufacturers have created more varieties, sizes and shadings in order to win more shelf space from retailers and more attention from consumers.

The hotel industry is struggling today. Demand is off everywhere in the world. Everyone is suffering, including Marriott. But Marriott will survive, and even thrive, in this market. It has been through bad times before and always has emerged the leader in the industry. (See Audio Tip #31: Volatility in Hostile and Non-Hostile Industries on StrategyStreet.com.) It leads its industry because the top management of the company focuses all its energies on delivering a consistent, predictable product in each of its dozen or more brand names. It is known throughout the business travelers’ world as the most consistent and reliable of brands. A traveler knows exactly what to expect when staying at a Marriott branded hotel and virtually always gets what he expects.

Recently, Google announced that it was creating an operating system to work on the new small netbook computers. Netbooks are the only part of the PC market that is growing today. Google hopes to introduce an operating system there in order to serve as a stalking horse to slip into Microsoft’s share with desktop and notebook PCs.

Microsoft is introducing Windows 7 to replace its unpopular Vista operating system. The company is at logger heads with its PC manufacturing customers over pricing for the new software.

Steel demand is down…by a great deal. The world’s steel plants are operating at less than 45% of capacity. This operating rate is one of the lowest ever. Yet, some U.S. stainless steel makers have actually raised prices by 5 to 6% since early May. The price increase does not come because of an increase in demand for stainless steel. That demand is off as well.

The evolution of a market often brings new consumers who prefer, or can afford, only low-priced products. In order to reach these consumers, a company must reduce its costs while it grows.

There are two pathways to low cost: Focus on particular customers and their product needs; or create economies of scale. When you combine both, you have a powerful low-cost engine that is also attractive to customers.

The debate is about to rage over healthcare costs and coverage. So, what might our future look like?

Verizon Communications recently announced that it was entering the market for cloud computing. Cloud computing is a service that allows a business to increase its computing power by using the internet, network bandwidth, on demand, from facilities operated by companies like Verizon. This market is fast-growing because it allows businesses to save the costs of building and managing their own computer facilities. Let’s use the Customer Buying Hierarchy to evaluate the prospect for Verizon’s success.

After failing more than once to create an innovative and attractive search product, the persistent Microsoft is back with a new entry called Bing. Let’s use the Customer Buying Hierarchy to evaluate the prospect for the Bing’s success.

The mobile phone hand set industry is fast growing, especially the segment known as smart phones, which combine the functionality of a limited PC or a good PDA with the normal telephone hand set functions. The new Palm Pre is entering this market. Let’s use the Customer Buying Hierarchy to evaluate the prospect for the Pre’s success.

Apple continues to impress with its moves in the smart phone market.

Now that GM has entered bankruptcy, there are many opinions crossing the wires about the likelihood of the new GM being a successful stand-alone company. I thought I might as well add to this crowd noise.

The consumer food industry has both an opportunity and a challenge in today’s marketplace. The opportunity comes as consumers reduce their “eating out” occasions and, instead, eat at home more frequently. The challenge is the seemingly inexorable market share growth of the less-expensive private label products. Some of the responses of the packaged food industry to these opportunities and challenges give us some insight into how to compete with low-end competitors and offset the ravages of a tough economy.

For many years now, large employers and governments have contracted with pharmacy benefit managers (PBMs) to provide and administer drug coverage for their employees. In turn, the PBMs tell the employers that they will pass on a good part of their purchasing economies to save the employers’ cost. This approach has worked well for the PBMs for years. They have been highly profitable businesses.

Recently, Europe passed legislation aimed at breaking long standing monopolies in Europe’s equity trading systems. As a result, a number of alternative trading systems poured into Europe’s equity markets.

Low-end products can save an industry’s bacon when the industry falls on hard times. Most low-priced products are what we call Price Leaders (see Audio Tip #83: Price Leader Products and Companies on StrategyStreet.com). These products offer less Function or Convenience than do the industry’s more important Standard Leader products, for common pricing savings of 25% or more. (See Audio Tip #81: Standard Leader Products and Companies on StrategyStreet.com.)

In February of 2009, we wrote a blog about Abercrombie and Fitch in a Leader’s Trap (see the blog, “A High End Retailer in a Leader’s Trap”). In that blog, we observed that Abercrombie and Fitch refused to discount its products in the marketplace, despite the fact that American Eagle Outfitters and Aeropostale, two of its main competitors, were offering lower prices. We noted that Abercrombie’s market share was falling, while Aeropostale’s was clearly on the rise. We predicted that Abercrombie would have to come out of its Leader’s Trap soon by changing its pricing policy.

Kraft Foods, Hershey Company, Kellogg and Campbell Soup Company reported higher profits recently. The key driver of these profit improvements was higher prices. For example, Kraft Foods’ profit in the first quarter of 2009 grew 10%, while its organic revenue grew 2.3%. Investors cheered because they had feared broad-based price rollbacks in the face of a tough economy.

Orbitz Worldwide, the online travel booking agency, competes with the likes of Travelosity and Expedia. Of the three, Orbitz is the most dependent on airline booking fee revenue for its profits. Travelocity and Expedia both reduced fees for their booking of airline tickets before Orbitz. Orbitz held on to protect its margins. Orbitz began losing market share and reversed course. It announced that it would waive booking fees on most flights booked through May. This brings its pricing in line with its competition.

One of our local snow ski areas has started offering a “no wait” pass for snow skiers on busy days. The pass costs $20. This $20 comes on top of the normal day pass the skier has purchased. This additional pass allows the skier to avoid lift lines by going through the “ski school” entry. Other ski areas have begun charging substantial fees for “close-in” valet parking, while letting most skiers park for free at a further distance from the lift lines.

SmithCNC-USA is an Ohio firm that helps small midwestern manufacturers obtain components and raw materials from China and Mexico. The firm’s customers are U.S. manufacturers who are doing small and medium sized production runs. These companies are under severe pressure in the United States because of relatively high costs here compared to those in China and Mexico. This company has convinced its customers that they can save a good number of their jobs, and perhaps, even grow, by outsourcing only part of their production to cheaper foreign sources. The company convinces its customers to outsource just some components in order to save the rest of the jobs in the customer’s organization.

Kraft Foods plans to introduce its DiGiorno flatbed pizza by offering to host Tweetups for influential users of Twitter (see Part 1 of this blog). In Part 1 of this blog, we described three major types of customer segmentation by need: Physical, Emotional and Intellectual. We also described patterns that companies use to innovate products to meet those needs including: providing information, reducing resources the customer requires for the use of the product and improving the experience the customer has with the product.

Over the years we have gathered several thousand examples of product innovations. We have found patterns in the needs of customers and in the approaches that companies follow to develop product innovations to meet those needs. At the highest level, a customer has three basic needs, which create three major customer segments. First, there are physical needs related to the physical situation of the customer or of the location where the product is purchased or used. Second, there are emotional needs, which reflect the customer’s personal needs for comfort, status and the avoidance of anxiety. Finally, there are intellectual needs which segment customers based on their current knowledge and understanding of the company, its products and how the products are used.

McKinsey and Company has undertaken a detailed examination of Productivity in the pharmaceutical industry. This extensive study offers us an opportunity to see common patterns in cost management and productivity improvement. We described these patterns in Part 1 of this blog. These common patterns of Productivity improvement include four major concepts.

The objective of every cost management system is to improve the Productivity of the Input (I) resources used to produce the final Output (O) product. These resources include the Inputs of People, Purchases and Capital. The Output is the unit of product sold. A simple measure of Productivity is Inputs divided by Outputs (P=I/O).

For a while last year, it looked like the legacy airlines were well on their way to profitability. Business and international demands were strong and the companies had pricing power. The legacy airlines attributed much of this pricing power to their strategy of removing capacity from the marketplace. Let’s look at how that capacity removal is working out over time across the entire industry.

The telephone industry has had its ups and downs over the last twenty years, but the wireless business has helped it survive nicely.

Over the last year, private label sales of food and other grocery products in the U.S. have grown at over 10% per annum. These private label products are examples of Price Leaders, companies and products who offer performance less than that of the larger, industry-leading, Standard Leaders for a price substantially less than Standard Leaders.

In StrategyStreet terminology, a Standard Leader is a company who sells the majority of its products at the most common industry price point. The most common product we call the Standard Leader product. At the high end of the market are those companies who offer products with extra features and services for prices starting about 10% higher than the Standard Leader product. We call those companies, and their products, Performance Leaders. In the personal computer industry, Apple is a Performance Leader; Dell and Hewlett Packard are Standard Leaders.

In our terminology, a Price Leader product is a low-end competitor in the market place. It competes against both other Price Leader products and against Standard Leader products, which are the industry leading products.

Cisco recently announced that it was entering the server market. Details are sketchy right now, but we might take a brief look at what Cisco needs to do to be successful. We will use the Customer Buying Hierarchy as our analytical tool.

A Leader’s Trap occurs when an industry leader, usually the first or second company ranked by market share, holds prices high in the face of declining industry prices. The industry leader expects that its customers will remain loyal despite lower cost competition. This decision is virtually certain to fail. Eventually, the industry leader will reduce its prices, but only after losing market share to the lower cost competitor. The North Lake Tahoe ski world is seeing the end of a Leader’s Trap. The world is about to get more interesting for skiers around this area.

For the most part, the airline industry has been in overcapacity and hostile operating conditions since it was deregulated many years ago. During that time, the industry produced many pricing schemes and even more competitors. Over the last few years, the competitors have decreased, while the pricing schemes have burgeoned.

The advertising industry is suffering along with the rest of us. As marketers in all industries retrench and cut costs, advertising agencies are feeling a margin squeeze. They are looking around for new services that might distinguish them from their competitors and enable them to gain share in a declining market. Some of these new services are Function innovations. (See the Perspective, “How Customers Buy” on StrategyStreet.com.) A Function, in our terminology, refers to the characteristics of the product that affect the way it is used by the customers.

The pizza industry is struggling. It has been struggling for some time, well before the recession put its icy grip on the industry’s throat. The costs of pizza ingredients have caused the prices in the industry to rise. The industry has always had to struggle with its less-than-healthy reputation. So, for some time, the industry has been losing share to healthier and fresher competition on the one hand, and less pricey hamburger and sandwich competitors on the other.

Many people in the United States have heard little of Tesco, but it is a great retailer. In fact, it is the fourth largest retailer in the world, following Wal-Mart, Carrefour and Home Depot.

GM has been a strong performer in the Chinese auto market. But their sales have hit a wall. In 2008, the Chinese automobile market was up 7%, but GM’s automobile sales were down 16%.

Not too many of us today would like to be in the retail clothing business. Fine retailers world-wide are suffering a dismal decrease in demand. Jos. A. Bank Clothiers has bucked the trend.

For the last several years, most landline telephone companies have offered special discount deals to customers who threaten to cut their landline service. But the trickle of customers leaving landline service, and depending solely on cell phones, has turned into a stream.

Recently, Vodapfone and Hutchison Whampoa announced that they will combine their Australian mobile telecommunications businesses into a joint venture. Currently, Vodapfone is the third ranked competitor in the Australian market, while Hutchison is the fourth. The combined subscribers of the new firm will still rank third in the market, but a relatively strong third.

Recently, Amazon introduced Kindle2. This e-Book reader is thinner and faster than its predecessor, which itself is only about a year old. One thing the new Kindle2 is not is cheaper than its predecessor. It carries the same $359 price tag.

I’ve done it. I’m sure you have as well. In fact, virtually everyone has done it at one time or another. What is the “it”? You call for customer assistance or information and you get…India or the Philippines. Both India and the Philippines are fine countries. They both have much to admire. But their ability to speak English clearly to an American listener is, by most accounts, limited. They do speak English, though, and they ask for little in compensation in return. So, many companies have shifted their customer service, especially consumer customer service, offshore to these countries.

The world’s largest manufacturer of home appliances, Whirlpool Corporation, has seen a substantial decline in revenues and unit sales in the last few months. The company, as well as the rest of the industry, has responded with lay-offs and other overhead streamlining. And one other thing…a price increase. Despite the price increase, Whirlpool expects to gain market share in this troubled time for its industry.

In a Leader’s Trap, an established industry competitor maintains a price umbrella and gives up market share to a discounting competitor. (See the Perspective, “The Leader’s Trap” on StrategyStreet.com.) The company in a Leader’s Trap believes that customers will stay loyal to the established company’s brand name by paying a premium for its product. Over time, the company in the Leader’s Trap not only loses share, but also sees its prices eventually fall to a level near the price established by the discounting competitor. Abercrombie & Fitch is now in a Leader’s Trap.

Dell Inc., the American computer manufacturer, is moving nearly half the jobs it has in Ireland to Poland. The move reduces Dell’s costs. It also sends a powerful message to the Irish and to other nations.

We are flirting with the highest levels of unemployment in a generation. Things feel bad and are bad. They could get a lot worse.

For years, Chico’s FAS grew rapidly by selling attractively priced, colorful clothes, to baby-boomer women. But the company began to stumble in 2006. Its growth rate slowed and its core customers migrated to other companies’ offerings. The company’s costs rose faster than its revenues, squeezing margins.

No matter the rate of growth in a market, the key growth measures to watch are those of the various Price Points. Here is an example.

In the early 1990s, I was involved with a company that faced a very competitive price environment. The company felt it could not increase the prices on its standard product. Instead, it raised its prices on the ancillary services it offered to all customers, though not all customers used these services. The company felt, at the time, that it could continue to raise these prices until the market took note and complained bitterly, or until its prices notably exceeded those of its competitors.

How can pricing hit zero? This has just happened with container freight rates or shipments from South Asia to Europe. Other rates are not much better. Container shipment fees from North Asia to Europe have fallen to $200, taking them below the shippers’ operating costs. $200 per container is bad, but how to you get to zero?

The global semiconductor industry is in severe overcapacity today. There are two causes for this current overcapacity: competitor expansion and a fall-off in demand. Competitors expanded rapidly over the last few years when demand was relatively high. New semiconductor capacity comes on stream in big chunks, produced in factories costing more than a billion dollars. Now, many of those factories are running at half their rated capacity as demand has fallen off in the last year. The situation is bad enough that, today, no company can make a profit on standard semiconductor memory chips.

The fight is on in retail pharmacy. It started with Wal-Mart. In 2006, Wal-Mart introduced a $4 generic prescription for a one month supply of hundreds of unbranded drugs. This move attracted a lot of buzz and new customer volume.

Overcapacity, where an industry can produce more than customers currently demand, is the result either of a fall-off in demand or the expansion of competition. During the 80s and 90s, three quarters of the industries that went into overcapacity did so as a result of expansion of competition. Industries such as semiconductors, airlines, mini-computers and even orange juice went into hostility as competitors expanded faster than demand grew.

The global automobile industry is in world-wide overcapacity. In 2006, the industry had the capacity to build 80 million vehicles. It produced just under 65 million vehicles that year. The industry breaks even on factory output at about an 80% utilization rate, roughly where the industry was in 2006. And with demand falling globally by 3% or so in 2008, you would think that the industry would not be adding capacity, but it is. Capacity is increasing rapidly. By 2011, the global auto industry is likely to be able to produce 100 million vehicles in a year.

About twenty-five years ago now, American Airlines introduced the first Frequent Flyer Program, which rewarded airline passengers miles for the “mileage” they had flown on the airline. These miles were convertible into airline tickets. This program spawned many copy cat competitors, including all the major airlines, hotels, car rental agencies, cruise lines and many other non-airline companies who wished to create a loyalty program. In many ways, the loyalty programs that the legacy airlines offered enabled them to keep their most attractive customers from falling for the blandishments of discount airlines, such as Southwest and Jet Blue. That may be coming to an end.

Charles Schwab Corporation is introducing the Schwab Bank Invest First Visa Signature credit card. This no-annual-fee card offers an unusual set of benefits. First, it returns a 2% cash rebate on all purchases, one of the highest rebate promises around, and it has no pre-set spending limits. Most other cards impose minimum spending hurdles before the rebates kick in. Next, there are no category (e.g. type of retail) restrictions on the spending with the card in order to earn the 2%. This benefit contrasts with most rebate card programs that require spending at certain locations to get the highest rebate. Finally, Schwab charges no foreign exchange fees if the card is used overseas.

Blockbuster is under pressure, and has been for a number of years. It is closing hundreds of stores. Still, it continues to operate over 3,900 stores in the U.S. and nearly 2,000 outside the U.S. The reason for its struggles is simple: Netflix. Netflix beat Blockbuster by offering a better business model to the American consumer. Eventually, Blockbuster copied the Netflix business model. But by then, Netflix was a powerful competitor. Blockbuster has been unable to unseat Netflix from its position of movie rental leadership.

These two companies are about to square off again.

For many years, managers manufacturing have measured activities to a farthing using methods developed over a hundred years ago with the time and motion theories of Frederick Taylor. But throughout most of these last hundred years, the service industries have managed to elude this management approach. That may be changing.

Over the years, we have studied several thousand customer buying decisions. We concluded from these studies that customers buy in a hierarchy of needs: Function, Reliability, Convenience and Price. Functions describe how a customer uses a product. Reliability defines how the company fulfills the promises made or implied to the customer. Convenience indicates the ease with which the customer can find, purchase and install the product.

I was struck by a recent article about statins. A recent study has found that these cholesterol lowering drugs reduce the heart risk in even healthy patients. That fact was not what struck me, though. What jumped out at me was the size of the market share for generic statins. The generics in the statin market make up 49% of total prescriptions. The well-known Lipitor is the leading branded statin, at 27%, followed by Crestor at 9%, Vytorin at 7%, and Zetia at 6%. But the generics dominate all of those branded drugs. (See “Low-end products are gaining share of market” in the Symptoms and Implications on StrategyStreet.com.)

General Mills is a $13.7 billion food company. In 2007, the company increased its profits by 13% on a 10% increase in sales. It enjoys higher margins than either Kraft or ConAgra.

Nike, ever the innovator, has found a new way to build brand loyalty. It has created a web site, NikePlus.com, that connects runners around the world. This web site tracks a runner’s data and allows a runner to join with other runners all over the world to improve their times.

The Associated Press is a cooperative. This “non-profit” is owned by 1,500 newspapers. It employs its 3,000 journalists in 97 countries to provide news stories to these newspapers, as well as others in the media, including radio and T.V. stations and web sites. This company has been getting some significant warnings lately about its cost structure.

Consumer Reports recently had a load of bad news for the domestic auto manufacturers. The big car retailers had even worse news.

The cell phone carriers are about to introduce a product innovation, called a femtocell, to improve cell phone reception within a home. These femtocells are about the size of a toaster. The wireless carriers will install these mini cell phone towers. The tiny tower will connect with cell phones inside the consumer’s home through a broadband internet connection to the telephone network.

Kohl’s Corporation is opening forty-six stores soon as part of a plan to gain market share as the busy holiday season starts in the U.S. Today, Kohl’s has something less than 1,000 stores open in the U.S. The company expects sales at stores open for a year or more to be down 2 to 4% during this year’s holiday season compared to last, so they are opening stores to make up for some of the sales fall-off.

The steel, automobile and airframe manufacturing industries illustrate three different stages of the evolution of mature markets. The theme is that mature markets with strong unions eventually end up with the workforce as the only true stakeholder in the business. Everyone else is secondary, and as a result, the workforce is at real risk of permanent job losses over a period of time.

Enterprise Rent-A-Car is an astute, well managed company. They have grown to the number one position in automobile rental by using their management skills to beat the likes of Hertz, Avis and National. Now they are starting to close the door on a growing low-end, Price Leader, set of competitors. A Price Leader is a competitor or product that offers below industry-standard performance for a very low price. More than 50% of a Price Leader competitor's total unit volume is usually sold at price points below the Standard Leader product.

Cogent Communications sells inexpensive, all purpose, digital connections to the business community. Today it carries 17% of all internet traffic. This is comparable to companies like AT&T, Verizon and Level Three Communications. Its revenue this year is on pace to grow by 19%. That all sounds good until you realize that the company expects to lose $25 million this year on the $220 million in revenue it expects. What is the problem?

Honda has the most flexible auto plants in the U.S. It does so with simple modifications to the robots and assembly lines used to assemble its products. Of course, this high degree of flexibility is the result of significant investment over many years. Part of this investment included the company’s efforts to ensure that vehicles are designed to be assembled in the same way, even if the parts of the vehicle differ. This flexibility has become a key strategy advantage for the company as the auto market gyrates due to volatile gas prices. Honda has the capability of adjusting its production faster than any of its competitors.

For once, the airline industry Standard Leaders, the legacy airlines seem to be improving their positions compared to the Price Leaders, the discount airlines. In our system of analysis, a Standard Leader is a competitor, or one of several competitors, or products that set the standard for performance and price in an industry. A Price Leader is a competitor, or product, that offers below industry-standard performance for a very low price. So far, none of the legacy airlines has gone back into bankruptcy. On the other hand, a number of Price Leader discount airlines have failed, including Frontier Airlines and Skybus Airlines. What has happened? Three things.

Recently, Nokia announced that its market share was likely to fall off somewhat in the future because it was refusing to enter into a price war with others in its industry who are discounting. Nokia has decided to stand apart from the discounters in the marketplace. (See the Symptom & Implication, “Large competitors are maintaining price levels as smaller competitors discount” on StrategyStreet.com. Unfortunately for Nokia, these discounters include the #2 cell phone maker, Samsung, and the #4, LG Electronics. (See the Symptom & Implication, “Price wars are spreading in the industry” on StrategyStreet.com.) The outlook on this decision is grim.

In 1903, Horatio Nelson Jackson did something remarkable. He made the first automobile trip across the United States, from San Francisco to New York City. His trip took 64 days. This time includes the waits for parts after the car had broken down. There were few roads in those days. Automobile travel was challenging in the extreme. Jackson drove a Winton Tourer automobile that he had named the “Vermont” after his home state.

In 2002, the average price for nickel was around $3 a pound. Shortly thereafter, the market took off. The price for nickel reached a peak of over $23 a pound in 2007, and has since fallen off. Today, its price is something short of $10 a pound. Still, the $10 a pound today is far above the $3 a pound of six years ago.

Over the last two years, eBay has raised its prices to improve its financial performance. Not that its financial performance has been bad. In fact, it has been good. But management believes it can be better with a price rise. The price increases eBay has provided the market have impaired eBay’s long-term future, even while improving its short-term profits.

Hyundai has announced that it will offer a luxury sedan in the U.S. market this Fall. The new model, the Genesis, purports to offer Lexus and BMW quality for a price 35% less than those competitors.

Boeing and its key union, the International Association of Machinists and Aerospace Workers, are clashing over negotiations for a new contract. The company is enjoying some of the best of times. As a result, the union has unprecedented leverage. So, what do these negotiations tell us?

Recently General Motors decided to provide a bumper-to-bumper full warranty for one year or 12,000 miles on its used vehicles going back to the 2003 model year. The warranty applies to GM Certified Vehicles. You might ask yourself, why would GM bother to add a warranty to cars that they have already sold? The answer is that the company wants to improve the residual values that the market puts on its used cars, and for very good reason.

The domestic auto industry has several companies that monitor the quality of automobiles. Some are short-term in nature. The J.D. Power & Associates’ Initial Quality Survey measures the quality of buyer experience over the first ninety days of ownership. Since all automobiles are under warranty during that period, this survey measures the hassle factor associated with early problems.

“Schlitz, the beer that made Milwaukee famous.” The older baby-boomers among us may remember that advertising slogan. It was all over the media in the 50s and the 60s. Schlitz, after leading the domestic beer industry for most of the first half of the 20th century, disappeared. It has been gone now for a long time. Recently, though, its current owner resuscitated the old brand and formula and re-introduced it to the market. Schlitz is in test phase now, mostly in selected mid-west markets, and its popularity sounds an echo of its former prominence. The story of the rise and fall of Schlitz offers lessons for us, even today.

Recently, United Airlines announced that it would reduce its service to some of the biggest cities it serves and shift assets to the service of smaller cities. Big cities like Nagoya, Japan and Chicago will lose some service, while cities like Grand Rapids, Michigan and Gillette, Wyoming will gain service.

The housing market is in a shambles, especially the new home construction market. In partial response to this horrible market, some of the home building industry’s largest competitors, including Toll Brothers and Hovnanian Enterprises, have entered the custom home market. Their entry illustrates the strengths of companies at the high end and exposes their vulnerability.

The leading waste management company, Waste Management Inc., has just offered to buy the number three ranked competitor, Republic Services. This offer preempts Republic’s offer to purchase the number two competitor in the industry, Allied Waste Industries.

You have to feel sorry for the beleaguered leaders of General Motors. The company is suffering through a perfect storm. Automobile sales this year will be fourteen million units, down from the sixteen million the company had expected. Down even more are sales of large SUVs and trucks, on which GM had pinned its hopes for profitability and cash flow.

Economies of Scale are important, at least in the minds of many managers and investors. Often, we can see these Economies of Scale at work in powerful ways. Sometimes, they seem to disappear.

As a market works its way through overcapacity and Hostility, the industry’s Price Point specialists come under extreme pressure.

Recently, CIBC World Markets’ Jeff Rubin, who is Chief Economist, and Avery Shenfeld, a Managing Director, produced a slide show called “The Age of Scarcity.” To see the slideshow in full, click here.

Again, we will look at two domestic industries in overcapacity: the automobile and the airline industries. We call these industries Hostile markets, because returns for most of the players in the industry are low and price competition is intense.

We have two domestic industries in overcapacity: the automobile and the airline industries. We call these industries Hostile markets because returns for most of the players in the industry are low and price competition is intense.

Some analysts have estimated that the domestic airline industry needs to reduce its capacity by 20% in order to become profitable. This estimate sounds very high to me, as I’m sure it would to most of the flying public. If you miss a flight today, or if one should happen to be canceled on you, you are not necessarily going to get to your destination today. Airlines are flying with a high percentage of their seats filled.

How and where you raise prices is an important question. The legacy airlines are doing it badly.

I am surprised and confused by the airline industry today. All the legacy airlines have announced substantial capacity reductions, in some cases by more than 20% of capacity. For example, United Airlines plans to ground 100 of its 460 planes in the foreseeable future. Some smaller cities will lose airline service completely. The legacies’ hub and spoke system is about to have fewer spokes.

Deutsche Post AG is surrendering in the battle for the ground shipments, the U.S. market for express delivery. Over the last few years, Deutsche Post has purchased both DHL and Airborne in order to compete in the U.S. market. These two competitors were numbers 4 and 3 respectively in the industry. Deutsche Post plans to transfer DHL’s North American Air parcel deliveries to UPS and reduce its U.S. capacity for ground shipments by a third in order to cut losses.

Recently, Intel announced the Atom chips. These chips are inexpensive, built for ultra-cheap desktop or portable computers called Nettops and Netbooks. The Atom chips for Nettops cost $29 each, while those for the Netbooks will sell for $44. These are both Price Leader products.

Two years ago, Dell bought Alienware, the leader of the game-oriented personal computer business. Game-oriented PCs are the high-end of the market. They usually sell for several times the price of the average PC. A game-oriented PC is a Performance Leader product (see “Why Do Leaders Lead?” in the Tools/Perspectives section of StrategyStreet.com). In the computer hardware business, the differentiator at the high end of the market is Functionality. This Functionality includes both design and computing capability. If you have these two functional benefits, you can generate word-of-mouth among buyers and become a hot product.

The RV market is in hostility. A hostile market sees low returns on investment, even for the industry leaders. One of the largest players in the market, Fleetwood Enterprises, has seen five straight years of losses. Another leader, Winnebago Industries, while still profitable, has seen four consecutive years of falling sales. This hostility has been caused by a rapid and deep fall-off in demand.

This entry is the last in our series of four entries on the HP/ED deal.

This entry is the third in our series of four entries on the HP/EDS deal.

This entry is the second in our series of four entries on the HP/EDS deal.

This entry is the first in our series of four entries on the HP/EDS deal.

Microsoft has problems getting its stock price up where it thinks it belongs. Some analysts believe that the reason, in part, is that Google has introduced free substitutes for the Microsoft Office products. These substitutes are called Google Apps and include spreadsheet and word processing applications. The fear is that Google’s advertising-supported free applications will force Microsoft to reduce prices on Office products where it enjoys a 70% gross margin. These fears are premature and probably overblown.

Microsoft, at least for now, has failed in its efforts to acquire Yahoo. If it had succeeded in this acquisition, Microsoft would have had to do some radical surgery on Yahoo’s search business, and on its own as well.

Even high-end brands can offer lower-end products. We call the high-end companies and products Performance Leaders. These companies and products offer better performance than the Standard Leader products in an industry for prices starting at least 10% over the Standard Leader product prices. Price Leader competitors are those companies who offer less performance than the Standard Leaders products for prices generally starting about 25% below those of the Standard Leader.

The modern hotel industry is really two separate businesses. The first business includes companies that have the hotel brand names. These companies manage and operate hotels. These companies include InterContinental Hotels Group, Starwood, Wyndham and Marriott. The second group are companies that are owners of the hotel properties. Most of these are REITs.

Heico Corporation is a Predator. In our research, we have found that there are four types of low-end competitors. They differ from one another in the benefits they offer, compared to the industry-leading products, to either the user or the buyer of the product. We call the industry-leading companies and products Standard Leaders.

Low-end competitors don’t think like industry leaders. As a result, they often blow big holes in the leader’s plans.