Big ideas often come out of small conversations. This seems to be the case with marketing guru Nirmalya Kumar’s latest book Brand Breakout: How Emerging Market Brands Will Go Global, which he has co-authored with Jan-Benedict EM Steenkamp.
“This book started one evening in my apartment [in London] when I was sitting with my friend JB [Jan-Benedict]. The latest Interbrand [a brand consultancy] 100 global brands list had come out. Not a single brand from the emerging markets was on it,” says Kumar, a professor of marketing and co-director at the Aditya Birla India Centre at London Business School.
“JB and I started talking about why things are the way they are. First we came up with reasons why there were no emerging market brands on the Interbrand list. Then we started to figure out how, if emerging market brands had to go global, they would need to go about it.”
Kumar and Steenkamp found one part of the answer in the list of the top 500 companies in the world. China has 73 companies on it—the second largest after the US. And here’s the nub: Most of these are business-to-business [B2B] companies, or those in the business of extracting natural resources, or those like China Mobile that are monopolies in their local markets.
B2B CAN DO WITHOUT BRANDING
“In B2B marketing, brands play a very small role,” says Kumar. “You go to the man on the street and ask him to name any of the top B2B brands. Chances are he won’t be able to name any. You ask people about ABB, nobody knows about ABB. Before it became Sony-Ericsson, nobody knew of Ericsson either.”
Nevertheless, there are some B2B companies that have been able to build big brands. But they are exceptions. “General Electric gets a branding because of being in washing machines and other electronic goods. Shell gets a name because of gas stations. IBM has a brand name that is consumer-oriented because they were in PCs and they have been around for 100 years or more. Otherwise IBM would not be a known brand,” says Kumar. “There are companies like Tetra Pak in packaging or Intel with its ‘Intel Inside’ campaign, which have been able to build brands.”
Companies from emerging markets don’t need to build global brands because most of them are not in consumer-facing businesses. Take Indian IT companies, for instance. They have concentrated on IT services, and not built products where they would have needed to create brands. “I suspect that the logic of a product company is very different from the logic of a service company,” says Kumar.
This is precisely why contract manufacturers in emerging markets haven’t developed brands. “Their existing business model is very successful. To evolve into a new business model with uncertain chances of success and doubtful profitability is unlikely,” he says.
Kumar cites the example of contract manufacturers in Bangladesh. “No country owns contract manufacturing like Bangladesh. When I was in Bangladesh, they told me, we have to have our own brands; we are tired of manufacturing for others. But their existing business model is so profitable, the question is do they need to develop brands?”
Also, to build a global brand in the business-to-consumer (B2C) space, companies need to create awareness among Western consumers through advertising and marketing—that may be an expensive proposition for emerging market countries. “The United States, Europe and Japan are probably the three most expensive places in the world to advertise. Given that, no emerging market can rationally make a case for advertising investment,” says Kumar.
Besides this, the country-of-origin effect [a psychological effect on customers when they are unfamiliar with a product] is also at play. “All Western consumers, when asked what they think of a brand that comes from India or China or any other emerging market, say it will be of poor quality,” says Kumar.
The irony, of course, is that consumers from emerging markets think the same about brands from their own countries. “Even Indian and Chinese consumers would say that brands coming from emerging markets, including their own, are of poorer quality than Western and Japanese ones.”
BUT BRANDS CAN BE BUILT
The dearth of global brands from emerging markets can be corrected in the time to come. There are a number of strategies that companies in these countries can follow in order to build brands in the West.
One is to use the diaspora route. “This strategy involves companies targeting immigrants from their own country and building enough scale and sales to support a brand push. You see a lot of brands doing that, including Pran [Foods] from Bangladesh, Dabur, ICICI Bank and, to some extent, SBI, Nando’s from South Africa, and Corona from Mexico,” says Kumar.
The second is the cultural resources route. Even though brands from emerging markets are considered to be of inferior quality by Western consumers, there are certain things that are regarded positively. “Even though Brazil has a poor image for any brand that comes out of it, nobody questions Brazil for fun, beach, sun and sand. That’s why they have a brand called Havaianas that sells flip-flops,” says Kumar.
Similarly, China is known for its ancient medicine and silk. India is known for ayurveda, a culture of history, yoga and religion. If a brand from an emerging market country positions itself around these things, it has a good chance of being accepted.
BRANDING COMMODITIES
Another route, which is very important for India, is through branding commodities. India has several such opportunities from Darjeeling tea and Mysore coffee to Basmati rice and Alphonso mango.
Once countries are able to brand commodities, they are able to get a price premium on that. “We have shown it with Columbian coffee (in our book). Even when coffee prices dip, Columbian coffee prices don’t dip as much. And Columbia is not even the largest producer of coffee. It is Brazil,” says Kumar.
First, the geographical region where a particular commodity is produced needs to be defined properly. “I have not seen any effort on this front in India. I know there is a Tea Board [of India] but there is a need for a Darjeeling tea board that authenticates things,” says Kumar.
Second, the production process needs to be tightened. “There are 14 steps that go into making some kind of wine in France. I bet you that even nine of them are not necessary. But it’s a way to show people that a lot of care is being taken in producing the wine to give it special qualities.
“Also, a very tough enforcement scheme needs to be put in place. If you try to put champagne on any sparkling wine produced anywhere else, it cannot be called champagne. Only sparkling wine from the Champagne region in France can be called champagne,” says Kumar. And any company using ‘champagne’ for sparkling wine gets sued by the French.
“Even the Americans had to remove the word champagne from their California sparkling wine,” says Kumar.
WHY CHINA IS AHEAD
Kumar is of the view that companies in China are better poised than those in other emerging markets when it comes to creating global brands.
“When Japan, South Korea and Taiwan started going down the path of globalisation, their quality of products was poor. Over time they put in R&D investments to improve the quality. China is the only exception as an emerging market; they have world-class manufacturing and nobody questions the quality of Chinese products when they are produced to Western specifics,” he says.
And it is easier to brand a product that is already high on quality. Kumar explains this with a thought experiment from his book. “Assume there are 1,000 Chinese manufacturers on contract for Western product companies and brands. They are manufacturing iPads and iPods for the world. So they can’t be bad. Out of those 1,000, let’s say 100 decide to build their own brand and try to diversify out of the low-margin contract manufacturing business where they are always at the mercy of Western companies. Out of the 100 who decide to do their own thing, 10 succeed. That means you will have 10 global brands coming out of China in the next decade.”
What also aids Chinese companies is that they think long-term. Indian companies don’t.
“Chinese companies have a long-term orientation, which comes from Confucius. They are playing for the next 100 years. They are not playing for the next 10,” says Kumar.
“And there is a reason for that: Indian companies are borrowing at very high rates from the capital markets. The major Chinese companies have state banks that are supporting them to some extent. So they are not paying the same interest rates, and can play the longer game much better,” he adds.
The Chinese government, too, has an eye for the future. “We might complain that the Chinese state is oppressive, but I have to grant one thing to the Chinese government—they do make big bets for the future,” Kumar says.
Take, for instance, their bet on urbanisation: “China knew 30 years ago that urbanisation is going to take place and they needed to have the infrastructure in place. They built that infrastructure. Today you can say that the Shanghai-Beijing train looks half empty. Yes, maybe it does. But they are not building it for today. You have to build the infrastructure for the next 20 years. I am sure it is going to be full some day,” says Kumar.
He adds, “The same thing is true for Shanghai and Beijing airports. They realise that they are building infrastructure for the next 20 years. We can’t be building an airport every two years.”
This interview was done when Nirmalya Kumar was professor of marketing at London Business School. He is now a member of the Group Executive Council, Tata Sons
The interview originally appeared in the India edition of the Forbes Magazine, dated August 23, 2013
Forbes India
Financial Inclusion is an Opportunity: BR Shetty
The Indian banking industry has seen consistent double-digit growth during the last 10 years. But there are several unmet customer needs—including financial inclusion, product innovation, low-cost innovative delivery models, leveraging technology and communication, improving efficiency, building long-term relationships with customers, etc—which the banking industry has to resolve. These challenges make way for opportunities, some of which are easy to capture. But there are many that require significant innovation or specialised skills. Probably this is the space where new players like the UAE Exchange could make a difference.
I ventured into healthcare way back in 1975 by starting NMC Health, realising that, until then, quality healthcare facilities were unexplored in the UAE. From those early beginnings, NMC Health has now grown into a group with two principal divisions—NMC Healthcare, which is the largest healthcare provider in the private sector with a pan-UAE presence; and NMC Trading, which is a leading pharmaceuticals distribution business in the UAE. This makes it one of the largest integrated private sector healthcare companies in the region. Today, it is listed in the premium segment of the London Stock Exchange (LSE) and is part of FTSE-250 index.
I ventured into remittance and foreign exchange with the UAE Exchange during the 1980s at a time when organised fund transfer mechanisms in the UAE were inadequate to cater to the burgeoning needs of a growing expatriate population and an expanding corporate sector. I felt the need to establish an organised funds transfer facility for expatriate Indians, who were finding it difficult to remit their hard earned money back home, cost effectively, through established banking channels.
For over three decades, we have been a leading brand in the financial realm, specialising in remittances, loans against jewellery, foreign exchange, etc. We have earned the trust of millions of customers by handling their hard-earned money with utmost care. Added to these, our rich infrastructure, technological prowess, branch network and subject expertise make us a strong contender for a banking licence. Above all, (there) is our experience in working closely with the bottom-of-the-economic-pyramid segment, which sends money in the range of Rs 15,000 to Rs 18,000. Working with this segment of customers and bringing them into the formal financial system is our biggest strength.
RBI guidelines stipulate a minimum capital requirement of Rs 500 crore to start with. We have planned much above that. Also, with the kind of network (we have) in India and our global reach, we have good NRI connections, which should enable us to raise a good amount of deposits in all the branches of the bank when we commence operations. Based on a financial plan, our initial capital will be sufficient to meet the SLR/CRR requirement, considering our existing NBFC (non-bank financial company) activity.
The funds will be raised through a combination of offering shares to the public through preferential allotment and from resident entities/relatives of the promoter group. The promoter group is worth Rs 3,800 crore.
We see the challenge of financial inclusion as an opportunity. As a leading global remittance brand, we have been dealing with a huge population, which belongs to the bottom of the economic pyramid. Most of them still go without a bank account. We are good at initiating workshops and other means to create awareness and improve financial literacy in the said population. Once we become a bank, we will work on the same principles. We will be focusing especially on opening branches in unbanked areas and on designing innovative products for this segment.
Also, the branches we set up in these areas will pay special attention to educate people about the need for financial savings and planning, thereby gaining their trust. We have considered commencing ultra small branches to reach out to a wider (population) cost effectively.
Currently, we have strong infrastructure in place with over 330 branches across India, including small towns and rural areas, of which over 145 branches are in Tier 2 to Tier 6 centres. Further, we have good number of branches in the under-banked districts and states.
(As told to Vivek Kaul)
The article originally appeared on www.forbesindia.com on August 5, 2013
The Almighty Dollar and the Fallen Rupee
“I am not an economist. I am an old bond trader,” said Drew Brick, who leads the Market Strategy desk for RBS in the Asia-Pacific region, when Forbes India caught up with him for breakfast on a recent visit to India. “We trade the noise,” he added emphatically.
Right now, the noise is about what US Fed Chairman Ben Bernanke said or didn’t say about his bond-buying. And this is why one needed to know what the “old bond trader” had to say about why the rupee was falling against the dollar. “What is happening now is really not a function of anything really specific to India, although India has an inclination to have problems,” explained Brick. Finance Minister P Chidambaram should welcome at least the first part of his statement, since he has been defending the “fundamentals” of the economy to anybody who would listen.
The foreign exchange market hasn’t been one of them, for it has been cocking a more attentive ear to what Bernanke had to say. And on June 19, he said that the Fed would go slow on its money printing operations in the days to come as the US economy started reviving. “If the incoming data are broadly consistent with this forecast…it would be appropriate to moderate the monthly pace of purchases later this year…And if the subsequent data remain broadly aligned with our current expectations for the economy, we would continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around mid-year,” Bernanke said at a press conference that followed the meeting of the Federal Open Market Committee (FOMC).
That statement impacted the bond markets most—and the carry trade. The carry trade is about investors who borrow in low-yield currencies to invest in assets in other markets, presumably with higher yields. Bernanke’s statement signalled that bond yields may go up, and that meant carry-trades would have to be unwound. Brick confirmed this: “We are seeing the unwinding of a lot of carry trades that have been taking place across the globe in the chase for yield.”
Brick, who bears a striking resemblance to Hollywood actor Richard Gere, had worked with BNP Paribas, Morgan Stanley and legendary bond kings Pimco before he joined RBS last year. He explained why the dollar is holding up even though US growth isn’t exactly something to write home about. “Some people think that the United States is the least dirty shirt in the drawer. And it has got growth, though not a very high trajectory of growth,” said Brick.
It is this minor revival that is creating problems for carry trade investors who have borrowed and invested money across the world on the assumption that US interest rates will rule close to zero in the foreseeable future.
The return of economic growth in the US has pushed up 10-year treasury bond yields. The yield, which stood at 1.63 percent in the beginning of May, has since risen to 2.5-2.6 percent.
Said Brick: “A bond works by a simple method. It measures three fundamental variables. What are they? Everybody who trades bonds thinks about where is growth going? Where is inflation going? And what is the risk premium?”
And what do we get if we apply this formula to calculate the yield on 10-year US treasuries? Explained Brick: “If the 10-year yield today is around 2.2 percent [it was so, on the day the interview was conducted], what would you say the US nominal growth is? Around 2 percent. What do you think inflation is? Around 1 percent. What do you think the risk premium is in the market place? Clearly it’s risen a little, so maybe it is 30 basis points.” (100 basis points make 1 percent).
This gives us a 3.3 percent yield on 10-year US treasuries. “And when the 10-year treasury is trading at a yield of 2.2 percent, what do you do as a trader? You sell that freakin’ thing. And that’s the risk,” said Brick.
When lots of bonds are sold at the same time, the price of the bond falls and thus the yield, or the return, goes up. And that is precisely what has been happening with 10-year US treasuries, with the yield shooting up by nearly 60 basis points from 1.63 percent in early May to nearly 2.2 percent on June 18, 2013. After Bernanke’s press conference on June 19, the yield shot up dramatically. On June 24, it stood at nearly 2.6 percent.
“The 10-year US treasury is extremely important,” said Brick. This is because it sets the benchmark for interest rates on all other kinds of loans in the United States, from interest rates charged by banks on home loans and home equity loans to interest at which carry trade investors can borrow money. More important for the rupee’s health, when the 10-year US treasury yield goes up, carry trades become less attractive. “The days of quantitative easing-sponsored carry trading are about to be pared, perhaps significantly. Remember, as volume rises, the cost of carry rises and so, too, does market illiquidity,” said Brick.
This is why investors have been selling a lot of the assets they have invested in and repatriating the money back to the United States. The Indian debt market has been hit by this selling and foreign institutional investors (FIIs) have pulled out nearly $5 billion since late May. In fact, stock markets all over the world also fell in the aftermath of Bernanke announcing that he will go slow with his money printing operations in the days to come.
The Federal Reserve has been printing $85 billion every month. It uses $40 billion to buy mortgage-backed securities, and $45 billion to buy long-term American government bonds. By doing so, it has been pumping money into the financial system and keeping interest rates low in order to spur growth.
But the growth did not come. Said Brick: “The truth is that central banks are running up their monetary bases but they are not necessarily getting any bang for the buck in terms of the turnover of the cash that they are creating into the system.”
Bernanke did not say he was going to withdraw all kinds of quantitative easing, or even that he would start withdrawing the easy money. That would require him to sell all the bonds he bought. The market though is getting ready for that to happen. “The market is already trading this. Forward pricing in the markets is already adjusting for this,” said Brick.
Low interest rates in the US after the 2008 Lehman crisis led Asians to borrow a lot in cheap dollars. “All across Asia, non-financial corporations, and even households to a small extent, have been taking out huge amounts of dollar funding,” said Brick. And this may cause some major problems in the days to come. “Right now we are seeing an unwinding of the dollar carry trade but at some point the dollar is going to turn and then the servicing cost of that debt is going to be all the more tricky. Every crisis that I have ever read through, and I am an old man, has always been born on the back of rising rate cycles that move higher with the dollar in tow. This makes the financing cost of debt in emerging markets more expensive. That’s across the board. That’s probably true here in India as well,” he added.
Brick suspects that there are problems lurking in the woodwork. “Corporates are relatively sanguine with a weaker rupee. But where are the cockroaches in the system? Where has the dollar funding been taken on offshore? Have Indians thought about what it means to have a rupee possibly at 65 to a dollar? And what would that possibly mean for the financing cost of banks that have almost certainly been taking on relatively cheap quantitative easing-sponsored cash in their offshore operations to be able to finance lending?”
If the rupee gets to 65 to a dollar, our oil bill will go for a toss. And will gold have a rally in rupee terms, assuming that its price stays stable in dollar terms? “Gold is a zero interest, infinite maturity, inflation-linked bond. That’s all gold is,” Brick responded. The supposed end of quantitative easing in the United States has taken some sheen off the yellow metal. “But it’s possible that we may have another move higher. The selloff has been rather pronounced. But it’s not the core issue here. Gold is a symptom of the larger issue,” said Brick.
Brick also feels that the bond market in the United States might be getting a little ahead of itself.
He reminded us about March 2012, when the 10-year US treasury yield had moved up to 2.4 percent. “Then, Ben Bernanke showed up on the tapes 10 straight trading days, running it back down [i.e. the yield]. My guess is that something like that will occur this time. The market is way ahead of itself.”
The broader point is that if yields rise at a fast pace, they will push up interest rates on loans. This will slow down some of the economic growth that seems to be returning to the United States. And that situation may not be allowed to play out.
So where does that leave Asia? “If quantitative easing gets tapered off as a consequence of relatively strong growth, then quite frankly Asian equities probably will hold in pretty well,” explained Brick.
And then came the but. “But if treasuries sell off massively as a consequence of technical reasons and a marketplace getting well ahead of itself, and dollar funding and interest rates get higher, then equities will get wasted out.”
“What is another scenario? I can give you millions of scenarios. But the truth is we don’t know in the opening stages, the first minutes of a three-hour movie, how it is going to play out. It’s going to be like a Bergman movie. I don’t know how it is going to play out but it is going to be weird at times,” Brick said.
Weird it will be, for “even the end-point of tapering [of Fed bond purchases] leaves the Federal Reserve with a still-gargantuan 25 percent-of-US-GDP balance-sheet. Pressures will sustain, even with reprieves,” Brick concluded.
The interview originally appeared in the Forbes India magazine edition dated July 26, 2013
Extending Your Brand May Dilute its Identity
Vivek Kaul
Vijay Mallya, the liquor king, who wanted to run an airline, recently told the staff at Kingfisher Airlines that he had no money to clear their salary dues. Mallya, like many businessmen before him, also became a victim of the line extension trap. “The line-extension trap is using the same brand name on two different categories of products. Kingfisher beer and Kingfisher Airlines. We have studied hundreds of categories and thousands of companies and we find that line extension generally doesn’t work, although there are some exceptions,” says marketing guru Laura Ries, who has most recently authored Visual Hammer.
Along with her father, the legendary marketing guru Al Ries, she has also authored, several other bestsellers like The Origin of Brands, The Fall of Advertising & the Rise of PR and the War in the Boardroom.
But does such a rigid line against line extensions make sense in this day and age, when it is very expensive to build a brand. “We have never said that a company should not line extend a brand. What we have said is that line extension “weakens” a brand,” says Ries. And there are always exceptions to the rule she concedes. “Sometimes, a brand is so strong it can easily withstand some weakening. Early on, for example, the Microsoft brand was exceptionally strong so the company could use it on other software products and services.”
There is also the recent case of Tide, the leading detergent in America, opening a line of dry-cleaning establishments using the Tide brand name. And it might just work, feels Ries. As she explains “Because there are no strong brands or national chains in the category, this can possibly work, although we believe Procter & Gamble, the owners of Tide, would be better off with a new brand name.”
These exceptions notwithstanding there are way too many examples of companies which haven’t fallen for the line extension mistake and are doing very well in the process. Toyota is one such example. And one of the reasons for its success is the launch of three new brands in addition to Toyota. Scion, a brand for younger drivers. Prius, a hybrid brand. And Lexus, a luxury brand.
“Initially, Prius was a sub-brand of Toyota, but the company recently decided to create a totally separate brand. Prius has some 50 percent of the hybrid market in America and is a phenomenal success. The separate brand name will assure its success for decades to come,” says Ries.
What about Apple we ask her? How does she view the brand, everyone loves to love? Hasn’t it also made the line extension mistake by launching the Apple iPod, the Apple iPhone and the Apple iPad? “Apple is not a product brand. Apple is a company brand. Nobody says, I bought an Apple unless they have just visited a grocery store. They say I bought an iPod or an iPhone or an iPad, three brands that made Apple one of the most-profitable companies in the world,” explains Ries.
So in that sense Apple did not really make a line extension mistake. For every new product it created a new brand. And the success of this strategy reflects in the numbers. Apple’s competitors, Hewlett-Packard and Dell, line extended their brands into many of the same products. Both are in trouble. Last year, Apple made $41.7 billion in net profits. Dell made $2.4 billion. And Hewlett-Packard lost $12.7 billion.
But what about Samsung, which has been giving Apple a really tough time in almost all product categories that they compete in. “Currently, Samsung is an exception to the principle that line extension can weaken a brand. But that’s only in the short term. We predict that sometime in the future Samsung will suffer for its marketing mistake,” states Ries. “What keeps Samsung profitable is the principle that in every category there’s always room for a No.2 brand. Coca-Cola and Pepsi-Cola, for example,” she adds.
And Samsung is clearly not as profitable as Apple. Last year, Apple made almost twice as much in net profits as Samsung even though Apple’s revenues were smaller. Apple’s net profit margin was 26.7 percent compared to Samsung’s 11.5 percent.
The other two big companies in the mobile phone market have been Nokia and Blackberry. Nokia recently launched a smartphone under the new ‘Lumia’ brand name. On the face of it this is exactly what Ries would have recommended. The company launched a Lumia smartphone, and did not fall for the line extension trap. Given this, why is Nokia losing out in the smartphone business, we ask Ries.
“What’s a brand name? What’s a model name? What’s a sub-brand name?” she asks. “Many companies like Nokia think they can decide what is a brand name and what is a model or a sub-brand name. So Nokia considers “Lumia” to be its smartphone brand name. Not so. It’s consumers that make that decision. Consumers use iPhone as a brand name and not Apple. Consumers also use Nokia as the brand name and not Lumia. To consumers, Lumia is a model or sub-brand name.”
And there several reasons behind consumers not considering Lumia to be a brandname. “Look at a Lumia smartphone and you’ll see the word “Nokia” in big type. Look at an iPhone and you won’t see the word “Apple.” You’ll see the word “iPhone” in big type and just an Apple trademark,” says Ries.
And on top of that Lumia doesn’t even have a website of its own (www.lumia.com is a website of a British IT company). “Lumia” doesn’t sound like a brand name and it doesn’t even have a website. That makes it very difficult to create the impression that Lumia is a brand. This isn’t the first line-extension mistake Nokia has made. Nokia was its brand name for a line of inexpensive cellphones. And today, Nokia is also using the Nokia name for its expensive smartphone products,” says Ries.
The Blackberry story goes along similar line. On the face of it, the company doesn’t seem to have made a line extension mistake. But Ries clearly does not buy that. “What’s a BlackBerry? Is it a smartphone with a physical keyboard? Or a smartphone with a touchscreen? It’s both, of course, and that’s exactly why BlackBerry has fallen into the line extension trap. To compete with the touchscreen iPhone, the BlackBerry company (formerly called Research In Motion) needed to introduce a new brand of touchscreen smartphone. It’s very difficult to build a brand that it has lost its identity.”
And given the lost focus its very difficult for these companies to go back to the days when they were immensely successful. As Ries puts it “It depends upon whether either company (i.e. Nokia and Blackberry) can do two things: (1) Develop an innovative new idea for smartphones, and (2) Introduce that innovative new idea with a new brand name. It’s hard for us to tell whether it’s possible to come up with a new idea for a smartphone. It could be too late.”
And this could work in favour of Samsung, feels Ries. “Every category ultimately has a leader brand and a strong No.2 brand. Since all three smartphone brands (Samsung, Nokia and BlackBerry) are line extensions, one line extension has to win the battle to become the No.2 brand to the iPhone. Samsung made massive investments in product design and development plus massive marketing investments,” says Ries.
So it’s logical that Samsung would become a strong No.2 brand. Furthermore, they priced their smartphones as less expensive than iPhones, another strategy that increased its market share although not its profitability. This has worked particularly well in Asia, feels Ries.
This success of Apple over Samsung comes with a caveat. As Ries explains it “Long-term, every category has two major brands. But they are normally quite different. Long-term, we see Apple as the leader in the high-end smartphone category and Samsung the leader in the “basic” smartphone category. Apple would make a mistake in introducing less-expensive smartphones. That would undermine its position at the high end.” And that is mistake that Apple needs to avoid.
Another massively successful company that has fallen prey to the line extension trap has been Google. The company has introduced a number of products under the Google brand name, but none of them have been massive money spinners like the Google search engine.
As Ries puts it “Currently, I can’t think of any Google product that is very successful. Google +, the company’s social media competitor, is nowhere near as big or as profitable as Facebook. Google’s most successful introduction has been Android, which now is being use by 75 percent of all smartphones.” Google bought the Android company, one of the reasons it probably didn’t use the Google name on the software.
What all the examples given above tell us is that line extensions have had a sketchy track record. So why do companies fall for it, over and over again? Ries has an answer for it. “As one CEO told us, We have a great company and great products. Why can’t we use our great company name on our great products?,” she points out. “Most chief executives believe that the only thing that really matters is the quality of their products and services their prices. Deep down inside, they don’t believe that the name or the marketing makes much of a difference.”
Then there is the pressure to keep increasing earnings. Chief executives are under pressure to increase sales and profits and they see product expansion (including line extensions) as the best way to achieve these goals. “The more important strategic decision is the question of “focus.” It’s our opinion that the best way into the mind is with a narrow focus. That’s not, however, the majority opinion, at least among top management people. Most companies are moving in exactly the opposite direction. They are line extending their brands,” says Ries.
Given this, CEOs don’t believe a new brand is worth the cost and effort required. It’s true, too, that many management people equate new brands with expensive advertising programs, feels Ries.
But that again is a perception that they have. Most big brands in the last ten years were not built because they advertised left, right and centre. Ries questions the assertion that it’s expensive to create a new brand. “It’s only expensive if a company uses advertising to launch the new brand. In our book, The Fall of Advertising & the Rise of PR, we recommend launching new brands with no advertising at all. Just PR or public relations. Advertising doesn’t have the credibility you need to launch a new brand.”
This is because when a consumer sees an advertisement for a new brand, his or her first reaction is, this can’t be very important because I’ve never heard of the brand. And that’s why some of the biggest brands in recent years like Amazon, Twitter and Google, used almost no advertising. They did, however, benefit from extensive media coverage, feels Ries.
In order to succeed in the years to come, companies will have to create multiple brands. “The future belongs to multiple-brand companies. But with one reservation. A company needs to be successful with its first brand before launching a second brand. You can’t build a successful company with two losing brands,” concludes Ries.
The article originally appeared in Forbes India edition dated July 12, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)