Is Febreze Disruptive? It Might Depend What Job You Hire it For.

I often start by reminding clients and prospects -- anyone who will listen -- that an innovative technology is a nice thing to have, and can certainly enable market disruption if it uniquely enables a large sustainable cost advantage, or a new way of doing things that is easier or more convenient. But technology is neither necessary, nor sufficient for disruption to occur.

Disruptive innovation is not about technology

Netflix was a good example in their early days. Yes, you placed orders for movies through a website, but there was nothing about the website that was novel or necessary in order to disrupt Blockbuster. In fact, they were considered a tech play because of the website, but there was nothing about technology that made Netflix successful (something they would have done well to remember when they tried to force an ill-advised price change on customers last year to combine streaming video and mailed DVDs). When Blockbuster added their own website and copied much of the mechanics of Netflix's ordering, it made no difference to their survival and did not enable them to prevent being disrupted.

Netflix's disruptive innovation was driven entirely by their business model. Apparently inferior to Blockbuster in the lack of physical presence to visit and browse movies and take something home to watch NOW (at least that's how Blockbuster positioned themselves against Netflix), they identified unmet and underserved market needs and created a new business model to serve them. By sending DVDs mail order from a central location, Netflix eliminated the huge cost of stores, and having inventory where it wasn't needed, and in the process enabled:

  • limitless catalog
  • convenience of not having to make a trip to the store either to pick up or return videos
  • low cost for high volume renters aka the best customers (flat subscription pricing rather than per video)

and removed friction in the rental process:

  • no late fees -- the number one complaint against Blockbuster and traditional video rental models
  • frustration when a desired title wasn't on the shelf

Dramatically lower costs could be passed on to consumers (and sustainable cost advantage is one of the key drivers of disruption), enabling rapid growth, and strong word of mouth helped Netflix avoid big marketing costs to grow.

What does this have to do with Febreze? Well, I started with Netflix because it is an example commonly misunderstood to be a technology-based disruptive innovation, when it really has nothing at all to do with technology, but is entirely about the process, the business model and the marketing. It's a company that most of us are familiar with, especially after its recent missteps, and it helps us make the leap to talking about a disruptive innovation that doesn't have any "tech" in it at all.

How the heck is an air freshener in a crowded marketplace an example of disruptive innovation?

Febreze is fascinating, because it started its life doing everything wrong, the way most "big company" new products are introduced to market. It was a product designed to be sprayed on draperies that reeked of cigarette smoke, a smelly sofa that was frequently inhabited by a wet family dog, or a room where cats had done their thing on the floor. It's purpose was to neutralize the odor.

The problem was, this was a made-in-the-boardroom problem. Although it seems reasonable to imagine that people are embarrassed and repulsed by these smells and would want to get rid of them, in the real world, the people who most needed to fix this problem didn't believe that they had a problem to fix. In the real world, people build up tolerances to smells the more they are exposed to them, and may even associate that "wet dog" smell with positive feelings. So, while any visitor to such a home might be hit in the face with detestable odors and wonder how people could live that way, the person who lives there has masked the smells in their mind and has no idea that their house smells like smoke, or like cat pee. And, even if they smell it a little bit, they certainly don't perceive their house to be unclean and in need of yet another kind of air freshener product.

So, when P&G launched Febreze as an odor-killing unscented spray in the mid-90s with ads targeting the homeowner's love for their pets, but hate for their smell, there was no resonance in the market with this messaging (might they have done better to target visiting friends instead?), and it was a complete dud in the market, with sales falling each month, rather than growing.

This scenario is laid out in a New York Times article (see pages 4 and 5 for the bit about Febreze) that details the work of behavioral researchers in understanding habits to influence purchasing decisions. The company was perplexed and sent researchers out to the field to try to understand what was happening with happy users of Febreze who were using lots of it, and what was different about them. Did they have more sensitive noses? Were they more anal about cleaning? Were they more socially embarrassed about the smells when visitors came over?

Febreze became an innovative market disruptor, almost by accident

It turned out that there were some avid users who had built spraying into their regular cleaning habits as a reward for finishing, so when the bedroom was finished being cleaned and tidied, a quick spray of Febreze on the comforter was the icing on the cake. When the laundry was clean, a spray of Febreze confirmed it. When the living room was cleaned and the sofa vacuumed off, Febreze was the finishing ritual. It wasn't that they perceived their homes to be dirty or in need of de-smelling, but that the spray at the end was a finishing detail to signal completion and get that little endorphin high that comes with completing something.

The happy ending is that P&G discovered this counter-intuitive behavior, and built this notion into their marketing. Sales exploded, to the point that it is today a best-selling $1B franchise. The now familiar ad template shows a giddy, self-gratified housewife who has finished the cleaning, gives it a shot of Febreze and closes her eyes to breathe in the warm fuzzy feelings. Or, more prosaicly, a quick spray when finished the task was the reward for finishing - the idea being to associate the product with habit formation and the good feeling of being done with the work and knowing that things were clean. In other words, rather than promoting it as a cleaning product, they are promoting it as something you should do after cleaning was complete.

So, the NYT article is about how statisticians and behaviorists are decoding habits and using them to sell to us, and the Febreze story is just a small piece of it, but it got me to thinking. What's interesting is that the original launch of Febreze was supported by conventional wisdom and conventional marketing. I'm sure they did research that confirmed everyone would like their homes to smell cleaner (a common symptom of bad market research is "confirmation bias", where people selectively remember things that confirm what they already believe to be true, or in this case, remember how much they dislike the smell in everyone else's home even when they don't recognize it in their own). Febreze would have been just another incremental and sustaining cleaning innovation, but for the discovery of this anomalous behavior of a few avid users. It may even have been cancelled for lack of sales had behavioral researchers not discovered the pattern of women using it when finished cleaning a room, rather than as a way to deodorize pet smells.

But hidden in the research story is that Febreze's ultimate success points to some critical factors that all "new market" disruptive innovations exhibit. Most notably:

job to be done. Early on, marketers positioned Febreze as an air freshener because they didn't understand the "job" that consumers were hiring it to do. It turns out that people didn't believe they had a smell problem. But, a quick spray at the end of cleaning a room created a habit-forming ritual that said "I'm done. This is clean and fresh and I can move on to the next room." A reward, and a signal of being clean, rather than a coverup of something shameful. Had the real job not been discovered, Febreze likely would have failed in the market as one of thousands of similar cleaning product innovations. By precisely targeting the job that the consumer identified with, they created positioning that is virtually impossible to dislodge them from. (Download this classic article which describes why identifying the job to be done is so important.)

target non-consumption. There were a small number of people who felt they needed a bandaid solution to mask disgusting smells. However, most people didn't recognize or agree that their house smelled bad, but did see a quick spray as a finishing touch -- almost like putting some sparkle on their lip gloss. By targeting the larger market of people who did not think their houses stunk and needed air fresheners as masking agents, but who did clean their houses, Febreze was able to identify a unique niche to dominate and grow from (now, people do buy Febreze as a quick fix to mask unpleasant odors, but that came later).

serve an unmet need. There was clearly an unmet need to signal "I'm done" and have a little celebration before moving to the next room. I suspect we all have this little celebration, whether we use Febreze or not, we step back and admire our work, smell the air. Febreze sprinkles the fairy dust that completes the job (that's how the ads seem to portray it). Originally unscented (because it was to mask odors, not replace them), Febreze now comes in many perfumed scents to leave behind the smell of "being done".

identify a new market. The new market for a deodorizing spray was people who viewed it as a finishing tool for cleaning. The people who it was originally designed for (those with smelly houses) didn't think they needed it, so the only way to sell it was to identify a new (adjacent) market where there was an unmet need.

Startups who are designing groundbreaking technologies that they believe are "disruptive" do well to remember these lessons. Disruption is a theory about marketing, not about product development or technology. To disrupt a market, you must be able to articulate a "job to be done" for which your target audience believes there is no better solution. You must meet an unmet or under-served need -- it's easier to sell to people who aren't part of the existing market (non-consumers who have opted out, and indicated that no available solution either satisfies the "job to be done" or is priced affordably), than to compete against incumbent solutions claiming to be better. And, you either need to be a "low-end" disruption (one which is targeted at the least demanding market segments based on pricing and sustainable cost advantage) or a "new market" disruption (create a market where none existed before).

Marketing and business strategy drive disruption

None of these characteristics have anything to do with building technology, but everything to do with appropriate segmentation, product positioning, messaging, and the compelling reasons why I would select your solution over all other available alternatives (which aren't necessarily products in the same "category"). Febreze ended up being a disruptive innovation because it succeeded (albeit after the fact) in marketing strategy, not because of how the product was designed.

Your thoughts?

 

Is Disruptive Innovation important to your business strategy? Download a free copy of the eBook 'Disruptive Confusion Unraveled' to learn:

  • the 6 most common misconceptions about disruptive innovation
  • how disruption creates growth
  • what it means to be disruptive and why the definitions matter
  • how to predict market disruption
  • how to measure the market value of being disruptive

Identifying Disruptive Innovators: Techzinglive Interviews Paul Paetz

On Wednesday, February the 15th, Justin Vincent and Jason Roberts, co-hosts of Techzinglive did a podcast interview with Paul Paetz, founder of Innovative Disruption.

The discussion begins with how to accurately identify a disruptive innovator, and why most companies that claim they are, actually aren't. Our ebook "Disruptive Confusion Unraveled", and Innovative Disruption's analytic tool, the Disruption Report Card are mentioned in the discussion.

The podcast goes on to cover a wide range of material, including discussion of Apple's success and how they fit the disruptive model, why it's almost impossible to find a disruptive large company, to suggestions for how to give Justin's product, Pluggio, more disruptive potential.

The discussion centered around the relevance of key factors in achieving disruption, including:

  • sustainable cost advantage / pricing strategy
  • market segmentation
  • targeting non-consumption
  • choosing the right competition to position against
  • business model
  • convenience
  • ease of use
  • targeting undesirable users
  • identifying the "job to be done" for a product
  • addressing unmet or underserved needs

Warning: we get down in the weeds with some deep theory and detailed analysis of examples. If you prefer lightweight, breezy material, this isn't for you.

Listen to the podcast here.

The 6 Most Common Misconceptions About Disruptive Innovation

In the nearly 15 years since The Innovator's Dilemma was published, the notion of disruptive innovation has grown in awareness immensely, particularly among tech startups, venture capitalists and angel investors.

It has become the holy grail for investors and entrepreneurs, with many funds targeting disruption exclusively. Yet, as strong as this meme has become, it is also one of the most widely misused and misunderstood terms among those same groups.

Misuse, Overuse, Confused Use

We can speculate about the reasons why. Certainly the word 'disruptive' is at once a powerful and suggestive descriptor, and simultaneously an instrument of misdirection. Disruption had a (strong) meaning before Christensen appended it to Innovation to label his theory (that's why he used it), and many simply imbue the phrase "disruptive innovation" with their personal interpretation of what it means to be disruptive. Or, they focus on the innovation part of the term, and think that means it's all about technology (it isn't).

More importantly, I think, is that the language Christensen used to write The Innovator's Dilemma is highly academic, sometimes deliberately ambiguous, often speculative, and extremely dense. When these attributes are combined, it makes for very difficult reading that is hard to make sense of even for dedicated practitioners and students of the theory. Then to compensate, Christensen himself often tries to over-simplify the theory to summarize it, and people take the simplistic descriptions as a complete rendering, repeating them as axiomatic.

On top of all that, the theory has been refined over time, but most people have read only the original book, if they've read anything at all. It's a a perfect storm prescription for confusion and misuse.

Not Just Another Square on the Buzzword Bingo Card

The result is that there are dozens of people preaching the gospel of disruption, many if not most with their own (commercial) agenda, and it is rare to find any two in agreement. Well over 95% of headlines and articles written about disruption are blatantly wrong or misguided, or metaphorical at best. And, many pundits and writers have taken a great deal of liberty and license in inventing their own definitions, or expressing what they think the theory says rather than the model it actually describes. Thus, we have tremendous misinformation, misunderstanding, and strong misconceptions about what the theory is, which is a shame because it is possibly the most important economic theory of the past 50 years.

Getting Disruption Right Matters

The problem with all the misinformation, fuzziness about what it is and isn't, and even deliberate misrepresentation is that if businesses don't understand what disruptive innovation really is, and what the opportunities and threats are, then the theory can't be applied. And, the whole point of identifying this phenomenon and describing how it works is to improve: to not be blindsided when new disruptions are on the horizon, to capitalize on massive growth opportunities, and place intelligent bets on the future by making wise investments.

Getting it wrong is like the old saw "if you don't know where you're going, then any direction will get you there". It's no different than if Christensen had never developed the theory in the first place.

Clarity About Disruption

In a newly published eBook designed to bring clarity and simplicity to the discussion and outline the business significance of disruption innovation from financial, growth, investing and risk perspectives, Innovative Disruption's CEO, Paul Paetz, describes the 6 most common misconceptions about market disruption. They include:

  1. All innovation is disruptive by definition
  2. Innovation has to be breakthrough to be disruptive
  3. Disruption only applies to technology
  4. "Disruptive" is just a marketing adjective companies use to imply that their product is more advanced
  5. Disruptive innovation is a meaningless buzz phrase
  6. All innovation is overrated, and disruptive innovation isn’t any better or different

Of course, all these notions are wrong.

Get your copy of 'Disruptive Confusion Unraveled' to learn:

  • why there are so many misconceptions
  • the strategic importance to entrepreneurial innovators and investors
  • what it means to be disruptive and why the definitions matter
  • how to recognize and predict disruption and measure its value

 

Disrupt, or Be Disrupted: Are There Only Two Choices?

Solving the Innovator's Dilemma

There's a question that I'm frequently asked that goes something like "So, I've read/heard about the Innovator's Dilemma and disruptive innovation. I get it -- interesting idea -- we all need more innovation. But what difference does it make whether innovation is disruptive or not? What can I do about it / how can I use it?"

Generally, the question is posed as a challenge -- a conversation starter when people are trying to understand what I do for a living and whether my services have any relevance to them. Sometimes it is the challenge of a skeptic: someone who doesn't believe disruption theory is valid, and they're looking for logical holes to punch through.

Normally, I use this space to discuss causes and effects of disruption, and case studies and disruption analysis that (I hope) is instructive and interesting. But my business is more than an intellectual exercise, so today I'm going to address this question head-on, and I hope you'll excuse if a tiny bit of selling creeps in. Hopefully, you won't even notice.

Why We Care About Disruption

In a nutshell, disruptive innovation catches competition off guard, and leaves them without adequate response. If you could design it as an attribute of your business, it is the ideal strategy, because it creates new markets, satisfies needs that are unmet or underserved ("Blue Oceans") by existing solutions, and determines who the dominant players with the highest margins will be for years to come.

Where They Ain't

"I skate to where the puck is going, not to where it is," is a quote famously attributed to Wayne Gretzky, the greatest hockey player ever. He was explaining to a reporter why he always seemed to be in the right place at the right time, and to have the best and easiest scoring opportunities.

Going where the puck isn't is the essence of disruptive innovation. If you solve the problems that no one else is solving (and that potential customers are willing to pay to have solved), at order-of-magnitude lower cost, and with the highest degree of simplicity and convenience, then you'll generally have a disruptive innovation on your hands.

The trouble is, how do you find those sweet spots in your industry, or in your business? It's easy to see the next incremental step in innovation -- make the 'off button' bigger and red, make the product smaller, add another function (whiteners in your detergent). But going in a contrary direction, or one that others don't see the need to, is a lot harder to do. For that, you have to ask the right questions, and I know, that's also easier to say than do. Unless you are starting with the right framework or lens for examining what people really need.

Apart from the natural resistance that many have to stepping out of line and being different, this is what is so challenging about disruptive innovation, and why disruption is so rarely initiated from within the industry being disrupted. Regardless, to be disruptive, you have to hit the competition "where they ain't" (see "Wee Willie" Keeler), and do it in a way that isn't possible for market incumbents to match easily.

Identifying the Value

As a disruption consultant, the principle benefits my clients identify with implementing a disruptive business strategy or disruptive business model include:

  • creation of new revenue streams
  • easier sales
  • much higher than average margins
  • lower cost of doing business
  • larger markets and largest market shares

Coincidentally, when you achieve those things, you also create the positive perception of being a trendsetter, an industry (market and/or thought) leader, and a supplier who is better able to serve your customer's needs. So, those are the simple surface answers to the questions raised in the first paragraph, but there is a deeper underlying question of how that opportunity can be leveraged. How do we create value from disruption?

Being Disruptive

I don't want to spend time here describing the services Innovative Disruption offers as a consultancy -- you can visit the pages of our website for that information. Simply understand that creating disruption and leveraging its value is done through a number of deliberate tactics, and that this process can be learned. Some of the key activities and priorities include:

  • identifying "jobs to be done"
  • radical simplification (of products especially)
  • dramatic improvement in accessibility, flexibility and/or convenience
  • change that enables nearly the same product/service to be done (or a "good enough" facsimile) for a fraction of the price
  • find ways to bring products to, or service market niches that are undesirable to incumbents

and, these are accomplished with a methodological framework, specialized analysis tools, Disruption Report Cards, and a mentality that experimentation and (fast) failure is part of the lifecycle of product introduction to be embraced because it is necessary to establishing product/market fit, not something to be punished. Lean startup behavior, in other words, is compatible with disruption (though neither necessary nor sufficient to create it).

Eat, or Be Eaten

We increasingly face a world where everyone is on one side of the equation or the other: disrupt, or be disrupted. The reality is that long term viability and sustainability of the business does not require disrupting to avoid being disrupted, but it does require the mindset of a disruptive innovator, and a willingness to seize disruptive opportunities when they are present. It also requires sustaining innovations 90% of the time, and the sort of operational efficiency that is often at odds with experimentation and innovation.

In other words, business needs a left brain and a right brain. You can't remain viable in the long term if you aren't constantly aware of when disruption is possible; on the other hand, maximizing the potential of disruption requires sustaining innovation and the sorts of activities that established companies excel at, and do every day. The key is to allocating a percentage of business activity to each of these dual modes, evaluating threats that could disrupt your business or industry, and being willing to cannibalize your own products and lines of business before someone else does.

Modern business allows no complacency. If you want to explore these questions more fully, I encourage you to download our ebook "Disruptive Confusion Unraveled".

Fighting Back Against Disruption: Has Starbucks Gone Far Enough?

'Bean' there before

A little over a year ago, Howard Schultz, then chairman of Starbucks wrote an internal memo lamenting the loss of Starbucks' distinctiveness. He wondered openly whether in the mad rush to expand and grow ever more operationally efficient (as measured by speed and same-store sales increases, rather than quality of experience), the company had lost a bit of its soul.

This memo was reported in all the major business papers and spurred a flood of blog postings from Starbucks critics and fans as Schultz seemed to have captured what was on everyone's minds, although still at that time, a largely unspoken feeling.

I too wrote an article taking a very different slant and documenting how and why Starbucks had allowed itself to evolve from being the market disruptor to the disruptee as a number of major foodservice chains began to compete on many of the now commoditized (and watered-down) features of the Starbucks experience -- better quality coffee, much lower price, more inviting workspaces to stay the afternoon and work or lounge, free WiFi, faster service and so on.

Through the remainder of 2007, it became increasingly clear that the days of heady growth, at least in North America, were indeed over, and that Starbucks competitors were taking direct aim at the weaknesses in Starbucks' business model armor that had crept into their operations over the preceding 10 years.

The company still looked healthy on paper, with year-over-year revenues in 2007 22% ahead of 2006 and record net income (profit). But, trouble signs included dramatically slowing same-store sales growth which had clearly reached a limit, and a large number of customers opting for the improved, more widely available and cheaper coffee solutions of the competition as I predicted in last year's article.

Additionally, by the end of 2007, long-time Starbucks loyalists were increasingly grumbling about what was wrong with the company and voting for change by going less frequently, or going elsewhere entirely.

Hello. My name is Howard. Remember me?

As if sensing that the tide of success was turning against his prodigy, Schultz moved back into the driver's seat at the company he built in January 2008, reassuming the CEO role and announcing a return to the basics of Starbucks vision and identity. While acknowledging that the competitive landscape was different, Schultz asserted that the problems at Starbucks were internally generated for the most part, and that the solution lay in self-examination, putting the primacy of the customer experience first again, and getting back to the core mission that had made Starbucks successful in the first place.

Since January, Schultz has been busy righting the ship with a number of dramatic changes, many of which were easy to predict and well-designed to rally the faithful. Last week, the most significant (economic) announcement was made, with 600 store closings and up to 12,000 layoffs coming, and it caught the attention of the business media, partly as a bellwether indicator of the down economy. Certainly that's the way Starbucks spun it, but is it the whole story (or even the right story)?

Slow train coming

Starbucks pre-bagged beans. Might be fresher, but that sweet coffee smell just isn't the same when you walk in the door.

Starbucks pre-bagged beans. Might be fresher, but that sweet coffee smell just isn't the same when you walk in the door.

In last year's article I identified several signs of disruption and difficult decisions for Starbucks to avert or at least parry with the competition disruption that Starbucks own mistakes had enabled (although in their defense and viewed from an internal "operations" perspective, these would have been perfectly logical innovations to improve efficiency, profitability and leverage the brand through extensions). These included:

  • pre-bagging coffee beans to preserve freshness (in the process, killing the distinctive coffee smell of an authentic neighborhood coffee bar, and the sensuality of sounds and sights such as scooping of beans, weighing and pouring them into custom bags, etc.)
  • expansion of chain to be almost as ubiquitous as McDonalds (turning them into a "true chain" experience, common but still expensive)
  • conversion from manual expresso machines to automatic to improve speed, efficiency and consistency of coffee making (at the expense of smells, theatre and "hand-made" quality)
  • dilution of brand experience due to rapid expansion, higher staff turnover and lower training standards, resulting in surly and uncaring baristas
  • introduction of warmed breakfast sandwiches and other foodservice items as a further brand extension (more brand and customer experience dilution)
  • expansion of music retailing operations (more brand and experience dilution)
  • expansion of branded non-food and non-music retail operations (more brand and experience dilution)
  • new "low end" competitors entering market serving "good enough" coffee options (upgraded coffee roasts, espresso and capuccino, "third place" alternatives) at significantly lower prices

Our recommendations included:

  • undoing the conversion of coffee bars into retail emporiums, restoring the "third place" ambiance and experience
  • improving training
  • getting rid of automatic espresso machines that made Starbucks just equal (in perception) to the lower-priced competitive options for many consumers
  • acknowledging that new "low-end" disruptors (McDonalds, Dunkin Donuts, local gas stations) selling fresh-brewed espresso at 25% of Starbucks price changed the game and required a specific competitive response
  • closing stores because the "coffee aficionado" market was already over-served (in the US market) given "good enough" competition at much lower price points

It's important to note that a few of these are counter-intuitive (at least to most by-the-book MBAs), and options that most businesses wouldn't consider.

For example, when I discussed the installation of automatic espresso machines last year, it was noted that the original decision to do this had cost millions of dollars. Replacing them would potentially both slow down service and retire perfectly good equipment before it was fully depreciated and had reached its natural end of life. (Although the equipment was a "sunk cost", most businesses that had made such a decision in the first place would not easily reverse it and incur additional expenses to restore an "experience" and recreate the lost competitive differentiation.)

And what has Schultz done?

The Clover Coffee Machine will elevate the quality and freshness of regular brewed coffee to the premium level that coffee enthusiasts expect, but not so for Starbucks espresso coffees, which will be even more automated than before with the Mastrena, reducing baristas to button pushers. Click on the image to read how the Clover system works.

The Clover Coffee Machine will elevate the quality and freshness of regular brewed coffee to the premium level that coffee enthusiasts expect, but not so for Starbucks espresso coffees, which will be even more automated than before with the Mastrena, reducing baristas to button pushers. Click on the image to read how the Clover system works.

  • get rid of breakfast sandwiches by end of 2008 (announced Jan 30), to eliminate strong smells that compete with coffee
  • slow pace of new openings and close 100 underperforming stores in US (announced Jan 30)
  • stop reporting on year-over- year same-store sales growth (announced Jan 30), which could only be achieved in long term by continued dilution of brand experience through increased retailing options
  • upgrade "partner" (i.e. barista, counter clerks, store management) training to re-focus on exceeding customer expectations and improve the overall experience (announced Jan 30)
  • acquisition of The Coffee Equipment Company for its Clover brewing system -- a method which creates a vacuum to suck the steeping coffee through a filter to create an individually brewed cup similar to French press (which pushes the filter through the steeping coffee) to create a superior flavored cup of "traditionally" brewed coffee, with enhanced richness and body (announced Mar 19)
  • introduce Mastrena espresso makers to replace current generation of automatic machines. (Although Schultz announced this, development of this machine, exclusive to Starbucks, was underway for 5 years.) Billed as enhancing the theater (because you can once again see the barista over its lower profile, and offering more control, it is still an automatic machine whose exclusivity doesn't address the quality and theatre lost with the old manual machines. (announced Mar 19)
  • Loyalty rewards added to Starbucks cards. (announced Mar 19)
  • Close 600 under-performing stores (up from only 100 under-performing stores in January).  12,000 employees will lose their jobs.  (announced July 01)

Overall, the emphasis of these changes is essentially the same as the recommendations I made last year, with the exception of two key points, which I'll discuss below.

The stated purpose has been to:

  • bring back the sense of theater
  • enhance the Starbucks experience consistent with brand expectations
  • put the emphasis back on coffee and hopefully undilute the brand identity

Unquestionably for drinkers of traditionally brewed coffee, the use of Clover machines to individually brew whatever you want from fresh ground beans (rather than chose from one of the three pre-selected coffees of the day) is a large improvement. Closing stores was expected because Starbucks was overbuilt, although Starbucks is blaming closures on the economy.

Is it the economy stupid, or is it really disruption?

For the first time ever, Starbucks has experienced a year-over-year decline in same store sales. The economy explanation has been picked up and widely reported in the media (because it fits the story that they want to report), but we have a hard time believing that Starbucks drinkers are consuming less coffee because of the price of gas.

More likely the economy is providing an incentive to the most price sensitive of Starbucks customers to switch to cheaper McDonalds or Dunkin Donuts alternatives, accelerating a trend that would have inevitably have happened anyway, due to the increasing availability of good enough low-end alternatives. Starbucks claims to have done research that disproves this, but we think they'd be wise to ignore the research, which is harder to prove than this more rational explanation.

The problem with drinking your own koolaid on something as strategic as protecting erosion of the customer base is that once people make peace with the mental switch from a high-end to low-end disruptive product, rationalizing that the low-end low cost alternative is good enough, they rarely go back.

The two things in the list of strategic changes that Schultz has implemented that are still at odds with "undisrupting" Starbucks are the switch to Mastrena ultra-automatic machines and not fully addressing the low-end threat for what it is. While the Mastrena may be an improvement in visibility of the barista, enabling them to participate in the experience for the customer, it is still an automatic machine. In fact, it automates more of the process, not less.

The supposed expertise of the barista is therefore non-evident -- they can't do any more to improve the espresso shot than can the cashier at McDonalds. The emphasis of the Mastrena is on higher volume (operating efficiency), and any qualitative difference in the cup of coffee between it and the Verisimo machine is so minimal, it is unlikely to be noticed by the majority of caffeine addicts patronizing Starbucks.

Starbucks closes 600 stores. Did too fast growth make them less exclusive as a brand? Did we really need new Starbucks in Starbucks parking lots?

This is a key element, because in no way does the replacement of old machines with the Mastrenas differentiate the end product or in the consumers' mind justify the higher price for Starbucks versus their competition.

Proprietary is not equal to different, and this is a sustaining innovation that reinforces that Starbucks has overshot the needs of their customers, but yet still underperforms on a key dimension -- the expectation of a quality hand-crafted coffee. An expectation that Starbucks created, but has now walked away from.

Secondly, Starbucks gives the appearance of continuing to be in denial that speed and price are performance criteria that a large percentage of their customers deem important, and that many will sacrifice the brand image of Starbucks to get a good enough cup at McDonalds.

Admittedly, this is a very tough line to hold, since through its chain-store ubiquity, Starbucks has ceased to be a unique neighborhood place, becoming instead the middle-of-the-road McDonalds of premium coffee. The only problem is, McDonalds is better suited and better able to be the McDonalds of premium coffee.

How then can Starbucks respond? Can it be different enough to continue commanding a huge price premium over its competition? If not, will business continue to siphoned off by low-end disruptors?

Is there a counter-disruptive response that allows Starbucks to not concede the low-end to McDonalds and Dunkin Donuts while maintaining its higher end niche for hard-core loyalists? Will Starbucks realize that the Mastrena is masking the real problem and that by positioning it as an improvement to the coffee experience, may actually lose more customers as it rolls out (if there is no taste difference, has Starbucks reached the limits of innovation in the core experience).

Will they recognize that purists want a manual shot pulled, or minimally a semi-automatic (because the barista has more control than with a fully automatic)? Can all these needs co-exist?

While we must praise Schultz for the aggressive return to Starbucks origins and a stronger vision, the question now is has he gone far enough, or is the past year a harbinger of much greater disruption to come? Or, has he recognized that disruption is the problem, and there are more surprising announcements to come as a result?

More importantly for investors, is this the end of Starbucks as a growth stock (SBUX - click to see performance over past year compared with Dow Jone and S+P 500), or at about 1/2 the valuation of a year ago, and still dropping, is it a buying opportunity?

Wall Street has been betting against a return to the days of heady growth, but does it have to be that way? I don't think so, but it requires disruptive imagination to see a way out. Perhaps Schultz sees it too.

What do you think?

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Note to American Idol: Fight Disruption with "Jobs to Be Done" Focus

My old guilty pleasure, American Idol, ended a few weeks ago, and I got to reflecting on the dynamics of the show itself and whether an article I wrote just before last year's finale would prove to be prophetic on review.

Last year's analysis discussed how AI was being disrupted, and whether the producers were either ignoring the problem, or didn't get it. In my review, I suggested some prescriptive changes that they needed to undertake to avoid an otherwise inevitable fate.

So, how did I do?

Last Year's Analysis and Predictions, Issues and Opportunities

  • American Idol rules the roost; as #1 rated show, it has become complacent and resistant to necessary change and highly susceptible to disruption
  • Any changes have become largely cosmetic (incremental "sustaining" innovations), and they've "overshot" the audience needs on the "slickness dimension" and no longer approximate an "authentic" experience
  • The reality that creates ratings for Fox is that only a couple of the top 12 are actually good enough to have a chance at winning.  The rest are there to become the train wrecks we want to vote off, to sass back at Simon, to sing gloriously out of tune and make us laugh, to impress with their self-absorption or self-delusion or just plain wacky personalities, to do whatever they do with Paula, and most of all, to give the audience time to get to know the eventual winner and build a following to buy their records.
  • The ruse being perpetrated is that the show is really a singing competition, when in reality the producers have constructed a promotional stage which sells lots of advertising (because of the entertainment value in seeing train wrecks get voted off the island) and a vehicle for selling pop records, crafted in the form of a quasi-reality show
  • A large minority of the audience has seen the wizard behind the curtains and tired of the deception, and using the power of the web, started to turn the tables on the show's producers, exposing the sham and actively working as a block to "Vote for the Worst", keeping the train wrecks going as long as possible at the expense of singers that the judges and producers actually wanted to "win". Last year, this resulted in the best singer (by any objective measure) being voted off early and two mediocre performers making it to the finale.  The resulting winner's album was awful, and sold miserably (opening week sales for Jordyn Sparks first AI record were less than 1/2 same stat for Fantasia, the previous worst-selling AI winner, and only about 40% of the same stat for Taylor Hicks, who was generally considered a bomb and was dropped by his label).
  • The voting system that Idol uses is suspect to begin with.  By asking the audience to vote for their favorites, and as many times as they want, they have created a system which generates revenue but can't reliably identify either the best singer or the audience favorite(s). Even superior voting systems (audience votes for the worst and the person getting the most negatives is eliminated, one vote per person, one ballet with yays and nays for all contestants tabulated, it is open to manipulation, but the way it is, the best singers and performers are routinely voted off several weeks too early.
  • Because of the above, the grand prize of a recording contract has become meaningless, and even a bit of an albatross. The contestants voted off early routinely get recording contracts and outsell the winners, because they a) can sing better, b) have more control over their albums (AI doesn't dictate what they can sing or how it gets produced), and c) therefore better songs, or at least songs they are better suited to sing, get on their albums.
The Two Davids: David Cook and David Archuleta

The Two Davids: David Cook and David Archuleta

Note that to try to deal with the last point, the judges practically fell over themselves this season to tell the voting audience as bluntly as possible who they thought needed to go and who should stay in an apparent effort to ensure that one of their favored singers actually won this time. They became so transparent about it, that Paula got caught offering judgment about a song that hadn't yet been sung, casting the wizard's curtain wide open.

Our conclusion: the above factors are causing audience disenchantment, and eating into viewership. The cynical business model that AI uses to milk the show for maximum revenue was easily disrupted by a little website exposing the underlying deceit.

The Results Are In

So, are these predicted results actually happening?  If so, how are they manifesting?

  • Viewership in 2008 was down an astounding 7% from 2007
  • In a year where the two stars were considered "hot" guys, the primary viewing audience of women aged 18 to 34 was down by 18%
  • The median age continues to skew ever upward, from mid 30s a few years ago, to 42 today.  Hardly the prime music buying age group.
  • The over 50 age group has increased in viewership.

All this suggests increasing irrelevance to the trendsetting youth audience, boredom among core fans, and disenchantment and disenfranchisement from the process. Typically when this sort of thing begins, it is irreversible because by the time executives acknowledge it is a serious problem (whether the product is a tv show, a newspaper, or a me-too generic cell phone, it's too late to make the major changes necessary to right the ship.

Will American Idol will take my advice?  There's no doubt they have to do something and we're highly likely to see some changes next year, but the question is, how will they diagnose what's going on, and therefore come up with appropriate solutions. (It's at this point that I should helpfully point out that if they want to get the skinny on how to counter this disruption before it kills the show, I'm available as a consultant.)  Here's a little free advice:

  • The dynamics are old, and some highly visible changes are necessary. First to get the shake up should be the judging crew.  Only Simon is core to the program -- it's time for Paula and Randy to go. Besides, the show needs more authenticity, and you can always count on Simon to say what he thinks in an entertaining way.
  • Sacrifice some of the revenue stream from voting to create a system that isn't as vulnerable to manipulation (people need to believe that their votes are meaningful if they're going to keep paying attention and spending money to vote).
  • Recognize that music trends don't stay the same forever. There was a minor nod in this direction this year as David Cook got more kudos and promotion from the judging crew as the show progressed. The interesting thing about him was that he already sounded like a lot of what's on the radio, and his looks and personality didn't hurt either, so it was easy to imagine him as the winner.

Jason -- CATS is sung by cats?! -- Castro

Most of the material that gets sung on the show is from a time before these kids were born (was it such a big surprise that Jason didn't know that CATS showstopping Memory was sung by an old dying female cat?), so it isn't that surprising that it's more popular with people older than 50 than with teenagers and 20 somethings.

It would help the producers to look at this from a "jobs to be done" perspective, rather than a "what we want to sell" perspective. The job to be done is to engage the youth audience (primary music buyers), identify a new "star" that they relate to, and create records that are current and interesting to that audience.  Like Chris Daughtry did (but then, he had the advantage of being voted off and picking his own band and music -- hmmmm.)

Understand that superstar singers and bands sing hit songs. After spending most of the season telling contestants that song selection is critical, how much sense does it make to give your winner songs which don't fit their style (make a blues guy sing a sugary pop song, for example), or which are simply crap (letting amateur song writers write stuff that is total trash musically and lyrically) and then asking a newly minted winner to make it a hit song is absolutely nuts.

One possible voting system that could work better would be to count song downloads from iTunes in the 24 hours following the performance show. Even if it cost the same as texting in a vote, the fact that you get the song with it would be a big discouragement to VFTW, and iTunes doesn't let you buy the same song twice (at least not easily).

These are some easy big things that would make things more authentic, freshen things up, and introduce some sustaining innovations to counter the disruption to American Idol's artful guise.  There are several smaller things as well, but the above would be a healthy start.  If not, watch for even bigger declines next year, and a franchise that may not recover from disruption.