Opportunities for Action in Consumer Markets
Winning in the New Economy: Consumer Marketers Face the Challenges
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Winning in the New Economy: Consumer Marketers Face the Challenges Whether they are incumbents or attackers, business leaders today are facing extraordinary uncertainties. Traditional value chains are deconstructing, brand value is becoming harder to control, channel conflict is a major concern, and every aspect of business is moving much faster than ever before. All this makes for an environment that is increasingly difficult to navigate. In September, The Boston Consulting Group held its ninth annual Consumer Marketing Conference, which explored the theme “Challenges of the New Economy.” A highlight of the event was a panel discussion that brought together informed industry observers, incumbents who are reinventing themselves, new Internet players, and infrastructure providers who are leading the transition to the New Economy. We thought you might like to hear how these domain experts are dealing with the problems we all face in the transformation. Michael Silverstein, host of the conference and head of BCG’s global Consumer practice, moderated a panel that consisted of the following participants: Chip Perry, president and chief executive officer of AutoTrader.com, the largest used-car classified advertising site on the Internet. Lisa Diamandakis, director of sales for BlueLight.com, a retail site for Kmart Corporation and other brands. Angela Kapp, senior vice president and general manager of The Estée Lauder Companies’ online division.
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Estée Lauder is a portfolio of 16 cosmetics companies and has licensing rights for other beauty products. Mats Lederhausen, senior vice president of corporate strategy for McDonald’s Corporation. David Pecaut, president of iFormation Group and founder and former head of BCG’s E-Commerce practice. An independent company, iFormation is owned by Goldman Sachs, BCG, and General Atlantic Partners. Its mission is to be the preferred joint-venture partner of Global 2000 companies (the world’s largest and most influential companies) that are building and accelerating their e-business opportunities. Silverstein: Before we address the themes of the conference, I’d like each of you to talk briefly about your business goals for the next few years. Perry: Our goal, from the time we started our venture three years ago, was to kill the used-car category. Today we have more than 1.5 million vehicles for sale and more than 4 million visitors each month, which makes AutoTrader by far the largest used-car marketplace in the world. People are attracted to us because we are using the power of the Internet to reduce transaction costs for buyers and sellers of used cars. Before we arrived on the scene, it cost about $250 to sell a used car. We’ve reduced that by 90 percent. And we give consumers five to ten times more listings than the typical newspaper, which means they spend a lot less time finding the car they want. Diamandakis: We hope to provide value in a couple of different ways: by pulling assets from our Kmart parent into our own distribution network and by maintaining strong relationships with direct vendors of supplemental products.
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Kapp: We expect Estée Lauder’s Web site to grow demand for our brands online and off-line. We’re in the process of executing our overall Internet strategy, which involves five individual brand sites so far; a destination beauty site called gloss.com, which will be relaunched next year; and modules on retailers’ sites, such as macys.com. Lederhausen: McDonald’s is a $40 billion, 45-yearold business. And we’re growing about 12 percent annually. But we need to do more than that. Therefore, McDonald’s is in transition from a company that revolutionized an entire industry with some core capabilities and a very simple strategy to a company that will leverage those assets across new brands and new business concepts. Pecaut: Our business plan is to invest $500 million to $600 million on eight to ten deals a year. In five years, we hope to have helped create e-business leaders in at least 20 major vertical categories—with 50 percent returns on our capital. We will have achieved that goal by helping Global 2000 companies unleash the power of their legacy assets online. Silverstein: We’re all struggling with new issues in our environment. Pretend that I’ve just handed you a battering ram to knock down the biggest obstacle in your company’s path. What will you aim at? Lederhausen: Fear is our biggest obstacle today—the fear of losing the advantaged position we’ve built at McDonald’s. Paradoxically, it seems that the more an organization succeeds, the more it fears risking that success to move forward. That fear is valid: premature abandonment of successful strategies can be a big mistake. At the same time, however, companies that aren’t constantly changing will eventually fail.
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Diamandakis: Fear is also an obstacle at BlueLight, but it is the consumer’s fear of privacy violation that we must overcome. We need to confront those fears head-on and assure consumers that their privacy will be protected when they communicate with us. Perry: Obstacles change as a company evolves. When we created AutoTrader, our goal was to define the product, the market, and the value proposition. Once we succeeded in doing that, our challenge became execution. Today I would aim my battering ram at anything that stands in the way of flawless management. Suddenly, we have had to scale up to 500 employees across the country, creating, as we go along, a cohesive culture that can deliver value to thousands of dealers and sellers and millions of consumers. For us, job number one is managing people, processes, and systems. Kapp: The first obstacle I’d attack with my battering ram would be the inevitable conflict between the traditional and revolutionary sides of our company’s culture. Then, once I got them working together, I’d direct their energy to unleashing the full power of our brands’ equity to millions of consumers. I want everyone to know what we’re doing online and what we can offer. I want people to seek us out, not stumble upon us by accident. Pecaut: I’ve probably talked to 25 leaders of Fortune 500 companies over the past six months about this very question: Which battles do you fight first and how? They tell me their biggest obstacle is the company’s culture—its history and the attitudes and behavior of its employees. Culture is an obstacle, but I believe the most challenging impediment is the power that finance departments, accounting models, and valuation specialists have over company leaders. CEOs are constantly looking backward to assess the
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value of what they’ve created over the past five years when they should be concentrating on the value they could create over the next five. As a result, even the most visionary CEOs have a hard time risking assets to develop the partnerships and alliances that will let them take advantage of the Internet economy. Silverstein: How do you deal with channel conflict— in particular, with manufacturers who want to go online and sell directly? Diamandakis: Channel conflict is mostly a problem of department store brands and therefore isn’t an issue for Kmart. Most of the products on BlueLight are commodities, available in many places already. We believe that what we offer manufacturers is a new channel to the consumer. Take batteries, for instance. When consumers buy battery-operated toys on our site, we make it easy for them to purchase the batteries at the same time. Kapp: The best way to manage channel conflict is to focus on increasing demand for the brand in all distribution channels. You also have to ask yourself whether your brand is a destination for consumers or simply an item in a large retail store. Our customers usually go to the most convenient store if they are looking for a particular Clinique or Estée Lauder product. So our brands are the destination, and the power to attract customers resides in them. With commodity products—say, hammers or nails—which might be sold at Home Depot, Kmart, or small hardware stores, the customer would probably be drawn more by the store than by the brand. The main challenge is to demonstrate that online channels don’t substantially decrease off-line demand. Additionally, for prestige or luxury brands, standards have to be upheld online so that you maintain brand
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differentiation as you do in the real world. If a retail store wants to carry our products on its Web site, it must meet certain criteria that protect the brand experience. Lederhausen: Our channel conflict is more on the business-to-business than the business-to-consumer side. We are likely to see competitors using the same tools and technologies that we have developed for our new platforms. But as we’ve told our owner/operators—and most of them agree—it would be wrong to try to prevent this even if we could. We haven’t formed consortia with our competitors, but that is because of the practical difficulties of doing so, rather than a reluctance to have competitors using the same tools. On the other hand, I believe it is healthy to keep competitors at arm’s length. Many of the consortia today produce more legal code than computer code. I’d rather build a platform quickly with a few partners that aren’t direct competitors and then, when it works, decide which are going to join us. Silverstein: If you had access to infinite bandwidth, and consumers were always connected, how would your business model or brand proposition change? Kapp: Prestige brands are defined by where they are sold as well as where they aren’t sold. You can buy Estée Lauder at Neiman Marcus; you can’t buy it at Kmart. That’s what makes it special. Now that our brands are widely available through online sites, their appeal will have to be redirected to focus even more on the customer’s experience. What makes someone choose MAC over Aveda or Origins will have to do more with the product’s image and qualities than with the delivery channel. Pecaut: We’ve been trying to identify the brand assets of the large corporations that are going to be most
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valuable in a high-bandwidth, always-on marketplace. For instance, in that environment consumers will have an enormous amount of information to sift through all the time. Successful brands will be the ones that help them manage that experience. The question is, Will it be the old or the new brands that do it best? Will the Yahoos claim that territory or will it go to incumbents that move beyond their traditional offerings to take over navigation in the new terrain? Diamandakis: The challenge will go even beyond navigation. It will also include editing, because consumers won’t want every message that is sent to them. Perhaps your brand could offer value as an editor. Some brands might even have to learn to edit their own messages or risk being edited by competitors. Perry: I think that the prospect of broadband is distracting us from how we can add value in the medium today. So far, broadband’s penetration is quite low. It’s still a niche market in the United States, and it’s going to be that way for some years. But the complexity of delivering services in that environment will be so much greater that we’ll have to reinvent content delivery and the online user’s experience. I think that focusing on that challenge today, when there are so few applications in the real world, is a waste of resources. There are so many other things that we could do to create a powerful online experience with the bandwidth we have. Silverstein: Let’s wrap up by looking into the future. The year is 2025. You’re talking with your children and maybe your grandchildren. They want to know what you are most proud of having accomplished in your life. What do you tell them? Diamandakis: I will feel proud if I have kept up with this incredibly fast-paced environment. But it’s not
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just a matter of running and thinking faster. You’ve also got to know when to slow down. You need to make sure you’ve nailed down your current successes before you build on them. In the next 25 years, I hope I will have helped a whole new generation cross the digital divide. Kapp: To be honest, if I’m around in 25 years and talking about what I’m most proud of having accomplished, it probably won’t have anything to do with the New Economy or my career. Lederhausen: I was going to say something similar. I’ll probably talk to my kids about our family and the values I’ve tried to instill in them. My kids are immensely proud of the fact that I work at McDonald’s, so in 25 years I’ll probably still be there if I want to keep my kids happy. McDonald’s has such an opportunity to touch people all around the world, and in 25 years I’d like to think that we found new and creative ways to bring smiles to more people. Perry: My children might also want to know what impact I had and whether it was good or bad. I’d like to think that I helped create a new way to shop for used cars. It’s a huge part of the American experience, and I’d like to have played a part in improving something that touches so many people. Pecaut: Looking into the distant future, I would like to think that I will have been able to take many of the ideas we talked about today and apply them to another problem that I think the private sector must help solve. That problem is the unequal distribution of rewards in our world. As we all know, the New Economy has been a fabulous wealth-creation engine. But so far, most of that wealth has gone to the top
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fifth of our population, while the bottom three-fifths have gained relatively little. I hope that in 25 years, my colleagues and I will have been able at least to narrow the gap between the rich and the poor—if not close it entirely. That’s what I’d like to be able to tell my grandchildren I helped accomplish.
If you would like to follow up on a point that one of our panelists made, or if you have additional comments or questions, please join us online at www.bcg.com/discussion/board.asp?forum=3. Or just visit the site to see what other readers have to say about the challenges of the New Economy. We’ll respond to questions within three days. We hope to continue our conference discussion online and welcome your participation.
© The Boston Consulting Group, Inc. 2000. All rights reserved.
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