The Line Extension Trap

One of the core concepts in Ries and Trout’s classic “Positioning” is the concept of the line extension trap. Brands must communicate a simple message to consumers that sticks despite our society’s communication overload. A line extension such as Starbucks Liquor can “blur the sharp focus of the brand in the mind”. It is easy for companies to utilize their brand equity by attaching it to unrelated products like Harley Davidson Wine, but it dilutes the meaning of the brand for consumers and undercuts the brand positioning strategy. One example is Ralph Lauren who has extended their clothing line to colognes, eyeglasses, bedding, dog sweaters, wallpaper, paint, gardening tools, luggage, and much more. What does Ralph Lauren stand for? No one knows.

How Important is Customer Service?

The level of customer service in America sucks. How often does the individual you interact with at most establishments, look you in the eye, smile, and talk to you in a friendly tone of voice. Maybe I’m too young to remember the days before Nordstrom, generous return policies, and frequent flyer miles. Perhaps my generation has higher expectations, ever since the customer became king.

But do people really care about service? Nordstrom, known for its superior service has seen it’s stock increase 500% since 2003. Starbucks, whose servers are consistently nicer than any store I visit, is continuing to grow at a scary rate. On the other hand people tend not to care about service when they can not afford it, take Wal-Mart for instance.

Seth Godin writes in Small is the New Big that “Customer service we see time and time again is a profit center; it is the cheapest form of marketing.”

It is human nature to want to experience positive interactions with people, even if we will likely never talk to them ever again. Everyone probably remembers times when an act of inhumanity has permanently tarnished your perception of a brand. For me it is why I have been trying to switch from Wells Fargo, though the direct deposit has proven to be quite a switching cost.

My point is that customer service can be a point of differentiation that gives you an advantage over your competition. You even take a low cost strategy and still provide excellent service, e.g. Southwest Airlines. All it takes is a positive attitude.

Low cost Strategy vs Differentiation Strategy

There are basically two strategic paths a business can travel down. Option one: take the low cost path, cutting costs as much as possible and then pass those savings to the customer in the form of lower prices. Option two: try to differentiate your product in such a way that consumers are willing to pay a price premium.

The first option can involve complex operations management schemes, outsourcing to third world countries, or limiting employee benefits like health care. The second option requires creativity and innovation in order to develop a differentiating quality.

Most marketers would attest that the second option is superior. Seth Godin says “the only route to healthy growth is a remarkable product”. The title Differentiate or Die by Jack Trout, speaks for itself.

But then there’s Walmart and Dell, who have shown us that the low cost strategy can be effective. On the other side of the spectrum there’s Apple Computer, BMW, and Nike who have used a differentiation strategy, to build tremendous brand equity.

The thing is, you can do both if you are creative. Southwest Airlines cut costs by only flying 737’s, eliminating reserved seats, and not serving meals. But they also differentiated themselves by creating a fun experience for guests by performing stand up comedy and jumping out of overhead storage bins. It shows that you don’t have to spend a lot to differentiate your product from the competition.

The 5 Forces Theory

Harvard Professor Michael Porter’s Five Forces is a great way to systematically consider the attractiveness of entering a given industry, in case you were not sure whether you should start that basement brewery you’ve been planning. Previously economists focused on consumer surplus, but Porter flipped this around to determine the attractiveness of an industry based on producer surplus. The result was a easy step by step way to estimate the profitability of an industry.

Force 1
Supplier Power
Do suppliers have power because you have few alternatives?

Force 2
Buyer Power
Do buyers have power because they have lots of alternatives?

Force 3
Threat of Substitutes
Can consumer’s easily substitute your product? i.e. Email instead of snail mail

Force 4
Extent of Rivalry
Are the existing firms highly competitive? i.e. Beer Companies

Force 5
Access to Entry
Are there high barriers to entry because of high initial investment or retaliation from existing firms?

If you answered yes to all these questions then this is not a very attractive industry to enter. Some of the forces may have varying importance depending on the industry you are looking at, which opens this up to subjectivity. However it is still better then going on your gut feeling, which has historically been less accurate.