I bet Bernie would like to work for Apple instead

The boss of Aussie department store Myer, Mr Bernie Brookes, was asked yesterday about increasing harmonisation of product prices across countries (presumed to be a response by suppliers and retailers to the exodus of customers to online commerce).

He said (with a delightfully Aussie oratory flourish):

“If you don’t do it the customer leaves you en masse. It is Darwinian shit: if you don’t do it you are not going to sell it.”

Damn the perils of actual international competition.  I bet he wishes he was in Apple’s big boots on this, as they seem very capable of selling the exact same song/app etc on iTunes for considerably different prices from market-to-market. See this link for a nice bit of comparative work – Aussies really get screwed.  I guess we’re the Easter Island of Darwinian natural selection.

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Have you heard of Anadarko? (Guest post from T.Osegowitsch)

My colleague Tom Osegowitsch suggested I write about this topic.  I countered with an offer to host him as a Guest Blogger.  So here is Tom:

Have you heard of Anadarko?

Chances are you haven’t. Yet Anadarko is a company currently involved in the largest oil spill in US history. The reason why you haven’t heard of them is because they do not have the iconic status and size of BP in the oil industry. BP (65%) and Anadarko Petroleum (25%) are co-owners (along with Mitsui of Japan, at 10%) of the ill-fated oil well presently gushing in the Gulf of Mexico.

BP is serving as the lightning rod for the public’s outrage. Its executives were hauled before Congress for a grilling. In the face of harsh criticism, the company has suspended its dividends, cut scheduled investments and liquidated some $US10bn in assets so as to establish a $US20 billion compensation fund. In an unprecedented move, BP has just been asked by the US Department of Justice to notify it of any “corporate restructuring, reorganisation, acquisitions, mergers, joint ventures, sales, divestments or disbursements” to counter the possibility that the oil giant could limit its liability.

In the meantime, co-owner Anadarko, a US-based company, has just paid out its July dividends and affirmed that it will continue to do so in September and December. And the company has by and large escaped the public and politicians baying for blood.

You might think BP was the operator of the sunken Deepwater Horizon rig which triggered the oil spill, and Anadarko, as the passive investor, should be spared. In fact, the rig was operated by neither. Transocean, a US company which recently relocated to Switzerland, was the owner and operator of the oil rig. Unless you have been following the disaster closely, you probably haven’t heard of them either.

In recent years, leading companies have had to shoulder a disproportionate share of the blame for misdeeds, acts of negligence or just bad luck. Irrespective of whether accusations are justified, the point is that they tend to hit industry leaders hardest, on account of these firms’ iconic status and market share. More generally, it seems that industry leaders are held to much stricter standards than the minnows.

This would seem to be an increasingly prominent yet largely overlooked source of diseconomies of scale, the notion that firm size – beyond a certain point – leads to an increase in average unit costs. Complexity is one frequently cited source of such diseconomies: as firms grow in size, managing a multitude of different operations and locations requires disproportionate coordination efforts which nudge unit costs upward. The higher standards expected of industry leaders (in the wake of a disaster or more generally) would seem to be another, growing source of such diseconomies.

Telstra has for a long time been viewed as the 600 pound gorilla in the Australian telecoms industry. The company’s dominant market share (mostly a legacy of its former monopoly status) make them a popular target of criticism from customers, suppliers, rivals and regulators. The same goes for Microsoft which in some circles is portrayed as a satanic force. Dealing with complaints, countering criticism and “setting the record straight”, as well as fighting law suits can be taxing on company resources and management time. Industry leaders are often singled out and held accountable for their entire industry. Activists of all kinds know that going after the “soft target” at the top of the industry is the quickest and most efficient way to affect change, thus elevating the leader’s costs.

Source: Frank Wright

Even companies previously embraced by the public are in danger of a backlash once they become sufficiently dominant in their industry. Google comes to mind. Even Teflon-coated Apple has recently come in for criticism in some circles for its powerful position on account of iTunes and/or its association with supplier Foxconn.

Market-leading size and position are often the ultimate objective of company strategies. Firms would do well to remember that such exalted positions are precarious. As Icarus discovered, the wings that allowed him to escape from his island prison also led him too close to the sun and, ultimately, his downfall.

Andre’s addition: I would throw in the disproportinate attention paid to Nike‘s (and, as Tom highlights, more recently Apple’s) outsourced labour practices as another version of this. Similarly McDonald’s seems to receive much greater scrutiny on the ‘healthiness (or not)’ front than do smaller (i.e. less successful) burger vendors.

Can anyone think of further examples (particularly Australian)?

Step back in time: the vinyl fightback

As some of you might know, I am a pretty big music fan, and have invested a rather silly amount of money over the years in increasingly redundant CDs (1200+?).

I still buy the things, but most of the music I listen to ends up coming out of my iPod or via ITunes on my desktop (as uploaded from said CDs). The process of playing a CD through the stereo at home doesn’t induce much romantic nostalgia. Yes, the stereo sounds better than the tinny computer speakers and bud headphones, but feeding the iPod through is just as satisfying.

What really is fun is plonking a record on the turntable, listening for the opening crackle, and also scrutinising the sleeve artwork at its natural scale (i.e. 12″ square). That’s music (and music consumerism/fetishism) at its most sensory (beyond the live forum).

The drama with the vinyl format for too long has been the difficulty of getting the tunes off the vinyl and into the computer/iPod. Of late, I have begun to buy more and more releases on vinyl, and the big drawcard has been stickers like the one above. Many vinyl versions now come with a little card or sticker inserted in the packaging which allows a download of an MP3 version of the same album. Now, my life is easier, and I have the best of both worlds.

And I’m not alone in getting excited about this. Vinyl sales just passed 2m for 2009 in the US – a number not seen since the early days of CDs.

This is a wonderful example of a technology (and thus a sub-segment of an industry) bouncing back from what looked like obsolescence. Too often we assume that technology (and consumers) only progress forward.

It would also seem this is not just a retro fad. The growth has been pretty steady for the past few years. It may well be a niche market, comparable perhaps to boutique beers, original artwork or hardcover books.

I do like the ideas of the original Wired editor Kevin Kelly on why pricier tangible products might be preferred by some consumers rather than ubiquitous and close to free digital versions. He refers to generative value:

“…a quality or attribute that must be generated, grown, cultivated, nurtured. A generative thing can not be copied, cloned, faked, replicated, counterfeited, or reproduced. It is generated uniquely, in place, over time. In the digital arena, generative qualities add value to free copies, and therefore are something that can be sold.”

He goes on to propose eight different generatives. The relevant ones for vinyl records would be embodiment and perhaps also patronage (i.e. you feel you should support the artist, and perhaps technology, involved). It is hard to see how digital music can address such issues.

What are the strategic management implications? Well, it seems to be smaller record labels and certain genres (dance music, garage and indie rock) that have embraced this collision of the physical and the digital. They may build a point of differentiation with fans (and bands). Presumably also those who have persisted with pressing plants, artwork services etc are now reaping the rewards of their persistence and rare capabilities.

What other industries have/will experience(d) such technological regress?

Disruptive technology amplified

I’ve posted on here before about the changing dynamics of the music industry. This interview with marketing guru and bigtime blogger Seth Godin highlights a raft of substantial and probably irreversible shifts that continue to bewilder the big record labels (See also his rearticulation of these ideas on his blog).

Godin has a neat take on the changes too:

This is the greatest moment in the history of music if your dream is to distribute as much music as possible to as many people as possible, or if your goal is to make it as easy as possible to become heard as a musician. There’s never been a time like this before. So if your focus is on music, it’s great. If your focus is on the industry part and the limos, the advances, the lawyers, polycarbonate and vinyl, it’s horrible.

Let’s put this into the language of strategic management ..

Disruptive technologies (internet, low-cost recording and dissemination of audio and increasingly video, filesharing) have diminished considerably (if not almost absolutely) the power of previously dominant players in the field. This includes not only the record labels but also radio, MTV and their cohort channels, bricks and mortar retailers, and producers of CD players and CDs.

Massive shifts in distribution channels away from many of the aforementioned mechanisms. Indeed we have seen almost a polarisation whereby there a few huge-scale outlets for buying digital recordings (i.e. iTunes, Amazon) and small ranges available in large scale retailers (WalMart, Target etc), and then an enormously lengthy tail for buying digital, CD or even vinyl, often directly from the artists, from indie labels or well-conceived aggregators (like CD Baby). And, of course, a huge proportion of the product is exchanged for free through filesharing.

These two phenomena have indeed changed the world of music as we know it. This is a fascinating case of disruptive technology, as it remains very unclear which businesses have gained from this huge shift in the nature of the value chain. You could argue that Apple has through its i-empire, but I’d hazard a guess that their revenue gain does not outweigh the losses of income to the record labels etc. Similarly, it does not look like the innovators (i.e. those responsible for MP3s, file-sharing protocols etc) have reaped much in return.

As Godin indicates, it would seem it is the musicians who hold much of the power now. The major barrier to entry of olden days – a major label recording deal – has fallen.

The marketing requirements have shifted considerably, with much less uniformity in the approach taken. Mainstream music has faded from our culture as smaller and smaller niches open up as viable and vibrant communities of interest.

It is unclear that major record labels have any competitive advantage at all in such domains. Indeed their credibility is highly questionable, and, with integrity and uniqueness so highly valued, their patronage may well be a burden for new acts. Indeed it appears possible to build a substantial following without a label or indeed much pay-to-listen product (as exemplified by the case of Aussie outfit Short Stack or US singer Corey Smith).

Musicians face considerable diversity of possible revenue streams, many of which are not subject to extreme bargaining power (merchandise, live performances, personal CD sales (i.e. at performances/appearances)), or offer considerable returns for limited effort (licensing of songs to video games, movies, advertisements). Increasingly there is little need to utilise the record label to tap these streams. I’ll finish with another quote from Godin which should remind artists where the gold may lie:

The idea that you could have a micro-market of 250, 500, 1,000 copies of a CD every night is a totally different way of thinking about what you do for a living, rather than making one album a year marketed with payola and promotion that reaches a certain group of people and ignores everybody else.