So, does size still matter? (I will publish this article in two sections, this one today and another on Monday.)

Section 1 

In business, historically size mattered

Business has a recent past of industry rationalisation, consolidation and size, where critical mass was what it was about. This applied to financial services, automotive, retail, airlines, telecommunications companies, fast moving consumer goods, pharmaceutical, media, cosmetics, hotels, restaurants and fast-food. There is hardly an industry where consolidation has not been applied. This means a few companies dominate almost all industries.

Much of this thinking was based on the principle of “the experience curve”.

The historic logic was simple – to support the required infrastructure in systems and people, volumes were required. Also, as industries commoditised, profit margins reduced, hence volume was the only way to beat the odds.

Now while some aspects of this will not go away, the context of how consumers are changing will force a chance. If not, a large company may just find itself having progressively fewer customers because, paradoxically, it is more efficient. Whilst new technologies today enable a combination of efficiency and better customer experiences, legacy IT systems were hardly ever designed to deliver that. Historic operational systems were designed primarily to automate manual processes or to manage the financial and risk aspects of the business. They were not designed with the consumer in mind. Hence the focus was on doing things fast and error-free, not always doing them well. 

The bottom line is many companies had lots of very unhappy customers but they ran fairly efficiently. Now this is all fine if everyone does that… after all, there is nothing like a banana if there is nothing but a banana!

In this process, consumers came second

However much we may justify industry consolidation – even call it inevitable, in the process, the individual consumer became less important. Whether this is cause or effect, is another issue but it does not really matter.

Hence, companies started focusing on efficiencies, benchmarking and “best-practice” as the holy grail, instead of looking at ways it could make the consumer experience paramount. Some brands in some industries have gone so far, that it is arguable as to whether they can ever reverse it. The well-known business thinker Prof Gary Hamel states companies “can only take corporate liposuction so far before you also take the heart and lungs out”. The inevitable end-result of benchmarking is commoditisation – the same cutter cuts the same cookies.  

Competition declined and “average” became good enough. Some brands within telecommunications and airlines were arrogant (perhaps just honest) enough to say it. Commoditisation increased and brand parity became the new normal. Companies became lazy about thinking how they can be different or threat consumers better. I even had clients tell me directly their brands are the same as other brands. 

In many industries, price became the deciding factor between brands. If everything is the same, why pay more? In the American airline industry, this has undermined the entire industry as a worthy investment. This is even evident in how the ranking of global brands (according to the BrandZ survey) has shifted away from the stalwarts to luxury and technology brands. In the minds of consumers banks are banks and telco’s are telco’s. And today retailers and  telco’s are also banks, so the question of value is becoming increasingly confused. How does a brand justify a profit margin? 

The issue of profitability – as against only critical mass – has taken central stage in business again over the last years. I believe the issues discussed here are at the heart of that. Companies are not only driven by volume any more, they need to extract the best value from their resources. To do that, they need to think and do differently. Benchmarking on efficiency is certainly part of that, but only the beginning. Creativity and innovation are at the heart of greater profitability. It took a company like Apple to make CEO’s realise this again. Creativity and innovation inspire consumers, make them loyal, create a barrier to entry and drive higher margins. 

One has to ask whether companies have an option but to re-think whether they put consumers at the centre of their companies. In my experience, this is far easier to talk about than to do. Almost everyone wants to do it now, but what it actually means and the impact it will have on the entire business, is severe. If a company opens that door, they need to accept what it may mean. That is why there is a move to change aspects of large organisations, rather than the organisations as a whole.

With so many industries facing serious challenges, from a lack of growth, to commoditisation, to disruptive newcomers, to sceptical and empowered consumers, companies have to fundamentally review the place of customers in their companies. 

Commoditisation has become the new normal

In the process outlined above the consumer has become a commodity; it was not about servicing them well, it was about servicing as many as similarly and as economically as possible. So if some defect, that is fine, as long as the total volume is still large enough to provide the required critical mass.

The costs of servicing a given customer well were higher than the potential gain from a more satisfied customer.

Of the best examples are airlines and telecommunications companies. High churn rates are easier to manage (ignore?) than increased value to the consumer. The costs of better and more integrated systems, better staff, better training, NPS driven KPIs and more exacting standards were simply not matched in potential gain. Eventually companies reaped what they sowed. 

The end-result is commoditisation, offering consumers products and services that are more-or-less the same, instead of the complexities (and costs) involved in customisation. The lowest common denominator became the yardstick; systems that are “good enough” instead of exceptional; staff that are “good enough” instead of exceptional; facilities that are “good enough” rather than exceptional. Although many companies used the terms “the best”, very few knew what it meant.

“Mass marketing” was the way brands dealt with it. Creating aggregate messages that appeal to aggregate people. It is still signified as best by the notion of “soap operas”, where “average” people, watch “average” programmes, in very large numbers.

When the above became too obvious – or when some companies recognised there is another way – market segmentation started, where groups of similar consumers were treated in the same way, so at least there was an attempt to differentiate at a certain level. It still did not acknowledge the differences between individual people, but it did between groups of people. So once implemented well – which happened rarely – customer experience improved.

This cannot however be compared to having a one-on-one experience driven by particular consumer needs and expectations. But it did bring some degree of consumer focus into companies. In the very least, it enabled fast moving consumer goods companies to target brands according to market segment. In its very simplistic form, it drove banks towards lifestyle advertising, depicting the needs, wants and aspirations of these “segmented” consumers. So we had groups of happy, smiling consumers, dancing and singing around the homes they bought with the loans the banks gave them! For telco’s we had businessmen in expensive suits. If this sounds facetious, it is, because that is not what consumer centricity is about. It requires a deep change in an organisation. 

Today there are “cracks” within the above approach. The very large global banks are experiencing difficulties for a host of different reasons, at least some of it connected to their diverse and very large global footprints. Brands often vary in their reach and market share; local brands are still stronger in some markets than global brands. It became obvious that the notion of global brands was not as pervasive as everyone thought. Many these trends relate to the fact that the consumer became a lesser part of the business equation. 

Just as everyone became very cosy, the world really changed.

Then some brands “broke the rules”

Small and disruptive brands became beautiful to some consumers: Southwest Airlines in the US, Apple instead of Nokia, Tesla instead of Toyota, ApplePay instead of Citi, the specialist corner store against Tesco, Amazon against Wal-Mart, Airbnb against Hilton, Emirates against BA, Netflix against the media networks.

These brands illustrated that being consumer-centric can attain an advantage in how consumers experience them. All of a sudden, being better also did not of necessity mean being more expensive, as brands such as Uber and Amazon proved. Companies succeeded because they offered consumer better experiences, not because they were large. The focus of companies started shifting towards how better value is created for consumers. This meant thinking differently about how problems are solved. It brought innovation back into the business conversation. It brought consumer insight back into the boardroom.

Not all of them are equally big and equally successful, but all of them together are large enough to cause disruption. All of them are able to make consumers see there are other options available. All of them at least able to make traditional industries ask questions about their own.

Industries and brands are fragmenting. At the heart of the fragmentation, lies putting the consumer first and having the technology available to service them well – and efficiently. Hence, it challenges the entire competitive paradigm of business.

This leaves legacy companies in a difficult space. They have spent generations building-up dominant positions, merging and acquiring other companies, becoming more efficient. In the process, these very strengths of historic competitiveness have now become constraints to their future competitiveness. 

To leverage these trends, brand management needs to change

In the follow-up section on Monday I will discuss how the above impacts consumers, technology, marketing and brand management.

Suffice to say, it is no longer business-as-usual. 

If large brands ignore these trends, three things are likely to happen:

1. They will gradually erode their consumer franchise and create, at the very least, consumers who are “sort-of” happy. In most industries this has already happened. In the least it means no brand loyalty, no barrier-to-exit and very price sensitive consumers. Increasing evidence says that consumers perceive brands in the same industry the same, hence brand parity is real. The profitability in many industries is flat. Hence, the current way of working is at the end of the road. 
2. They will empower competitors, old and new, to take advantage of the dramatic changes in consumers and technology. While these changes may  not in the short-term impact very large brands, it will allow others to become “first movers” in a changed marketplace. Generally, first movers become very dominant. This will threaten stalwarts. More importantly, it will be opportunities missed. After all, leaders remain leaders because they innovate. There is an old saying that companies don’t steal customers from other companies, they simply attract dissatisfied customers of other brands.
3. Large legacy companies face a huge degree of discomfort. They are not always entirely sure what to do – it is not always so simple to know what to do – but they are increasingly aware they need to respond. In the least, most now accept whatever they do requires the consumer to get back to the centre of their companies. Even the conversation about efficiency seems to take a back seat now. 

We will talk more about the marketing and brand implications of fragmentation in the next section of this article on Monday.