Monday, March 8, 2010

Cutting their way to greatness

A company in a downward spiral can never cut its way to greatness — and rarely even to survival. Yes, it should throw losing products and divisions over the side, but in the end, it will never survive unless it can find some profitable core operations — and continue to build and build upon those operations.

Two examples come to mind. During a run of miserable CEOs, Yahoo was cutting left and right but not building anything. Now Carol Bartz has defined the core focus of Yahoo as a consumer media company. Who knows, it might even work, but at least it’s a plausible shot at turning around a company that’s fallen long and hard.

The other example is HP, which made a wrenching (but successful) shift from an innovative company to a cost-cutter, as designed by Carly Fiorina and implemented by Mark Hurd.

Washington Examiner contributor (and law school professor) Glenn H. Reynolds offers a counter-example of how not to do it, using a once-storied beer brand: Schlitz.

When I began drinking in college — the pre-Jimmy Carter drinking age was still 18 — the word “Schlitz” had become synonymous with swill. The epitome of this was a fellow Baker House freshman who was so cheap and so intent on getting blitzed on weekends that yes, he’d even drink Schlitz. (Today I can’t even finish a Coors, let alone a Bud — give me a Firestone IPA.)

But apparently Schlitz was once a premium beer. Reynolds explains its self-inflicted slide into oblivion:

Schlitz was once a top national brew. But, in search of short-term gains, it began gradually reducing its quality in tiny increments to save money, substituting cheaper malt, fewer hops and "accelerated" brewing for its traditional approach.

Each incremental decline was imperceptible to consumers, but after a few years, people suddenly noticed that the beer was no good anymore. Sales collapsed, and a "Taste My Schlitz" campaign designed to lure beer drinkers back failed when the "improved" brew turned out not to be any better. A brand image that had been accumulated over decades was lost in a few years, and it has never recovered.
The rest of Reynolds’ column would probably raise hackles here in Silicon Valley — a small government criticism of the Federal government’s self-inflicted damage to its own credibility and legitimacy.

Still, Schlitz provides a great lesson illustrating a key point I teach my students about strategy: make your strategic choices internally self-consistent.

Penny-pinching for a premium brand can be done — as Apple did in the late 1990s, when it fixed its production and supply chain cost disadvantages. However, it’s always a tricky combination to pull off. The only two ways I’ve seen it work is to do what Apple did (favor quality over cost), or what HP did (accept commoditization and switch to a generic low cost strategy).

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