I sat for half an hour listening to the tirade of a marketing guy from a major manufacturer who had gone down the quality path only to find over and over again that lower quality, lower cost product from Asia was being chosen in lieu of his product.  What he had missed (and I tried to tell him, but he was far too focused upon the unfairness of it all to hear it) was that unless there is a clear emotional fulfillment provided by your product or service, quality means little.

What the Alpha Factor Project discovered was that functional performance (quality, product performance, features, etc.) only have to meet the minimum acceptable functional requirements to be considered and purchased. Once that hurdle is crossed, the battle becomes one of which brand offers the most emotional fulfillment? That means “self-satisfaction” (how I feel about myself when I buy or use your product or service) and “personal significance” (how I believe others feel about me using or buying your product or service).  If none of the other products provide any emotional fulfillment, then the choice becomes one of price.  Among those that do provide some level of emotional fulfillment, the comparison is one of which provides enough to warrant the greater price?

I may buy Kraft cheese to make cheeseburgers, but I will probably buy a much more expensive and more unique cheese to serve to friends with wine.  If the Kraft cheese is acceptable to me (meets minimum functional performance) and I don’t think anyone will see what’s going on the meat, then why would I spend the extra money?  Where the cheese will be seen and it will be a major focus of the entertainment, then I may spend ten times as much to make sure it’s really something that will please and gain points with my guests.

This kind of behavior can be quite predictable with a range of brands or products getting my attention based upon the situation and likelihood of anyone noticing. When an Alpha company enters the game, however, things start to change very rapidly.

The Alpha, by definition, is in the process of continually defining what it means to be in that category or product or service. It defines the expectations and the aspirations of customers in that category.   There may be a minimum acceptable functional requirement, but that starts to move upward as the Alpha defines new, higher expectations.  Almost every competitor begins to focus its attention upon competing with the Alpha.

Even though Starbucks is having troubles right now, it has been the Alpha in the coffee shop category for a long time.  It neither invented the coffee shop concept nor did it better than everyone else.  It did, however, bring a new minimum acceptable functional requirement to the category that pushed many local shops to do a much better job than they had in the past.  Every other shop out there (whether they were better or worse than Starbucks) competes with Starbucks and compares itself to them.  Sadly, it is because Starbucks has fallen below the minimum acceptable functional requirement that they set that they are now experiencing the problems they are.  It isn’t just the fact that they over-expanded; it’s that they over-expanded for the lower functional performance they were providing.

Harley-Davidson, another slipping Alpha, has fallen into the same trap. When Harleys started becoming better motorcycles after the company was purchased by some employees in the early 1980s, a new and higher acceptable functional minimum was established.  Despite their poor quality, up until that point in time they had been the minimum acceptable functionality.  Most Japanese bikes were already far above that, so it did not affect them, but it did establish a new higher minimum that had to be met.

Unfortunately, H-D (like Starbucks) fell below that minimum they set.  They also allowed other manufacturers to begin to define the leading edge of the “cruiser” and “chopper” categories that they had owned.  Now a new, even higher functional minimum has been set, and Harleys don’t measure up either in functional performance or in emotional fulfillment.

Apple, on the other hand, is setting a much higher functional minimum in both its iPod and iPhone products.  What was acceptable just two years ago is no longer acceptable.  If someone chooses one of the competitive products, they do it knowing that they are sacrificing something they aspire to own and experience. Even among those of us that thought that there couldn’t be that much difference between lesser brand versions and the “real thing,” the truth becomes quite apparent after enjoying the “i” experience for even a few minutes.  This new higher experience has become the benchmark for everyone else to reach.

The secret to Apple’s success, however, is not the technology that looks far beyond competitive products, but actually is probably less cutting edge than it seems.  It is the emotional fulfillment that comes from owning, feeling (they really have a terrific tactile character to them), and sharing them with others.  Competitive products tremble in comparison.

Apple’s Mac computers have long had a much higher experiential factor that should have made them the Alpha of the personal computer category.  Because they focused so heavily upon the “artistic” market with software and marketing, they missed being able to drive minimum functionality higher in the overall category.  Unfortunately, Microsoft (through a lot of shenanigans) made themselves the minimum functionality required for most businesses and computer technicians, which drove the choices most individuals had, as well.

Now that Apples has been able to make their product more available to all the poor souls who had to put up with Microsoft products for all those years, they are emerging as the clear Alpha of the category.  Who would not aspire to own a MacBook Air?  It feels great, looks great, performs better than any PC laptop I’ve owned, lets me do beautiful presentations, displays none of the software “crankiness” that my old XP-Pro machine did, AND runs Microsoft Office programs.  I also have people walk across the room to ask me about it.

Quality is not and has not ever been the real “Holy Grail” that is has been purported to be.  Emotional fulfillment is the core of Alpha learning, leadership, and innovation.  Good enough is truly good enough until emotional fulfillment comes into the picture.

I just read an article in the Wall Street Journal that once again noted the continuing sales strength of “high-end” goods despite all the fear about an economic downturn.  And we aren’t talking about “millionaire” products.  This particular article was talking about Coach leather goods, which are just barely above mainstream.  

I’ve noted before that Mercedes dealers (at least the ones who were doing well before the economy started heading south) have been doing at least as well as last year and many cases better.  And their sales strength is not at the high-end of their line where you would think those immune to the economy might be, but rather at the low-end, catching trade-ups from “lesser” vehicles.  Every other auto brand I’ve looked at is hurting badly.

Apple is making money, and it’s not because of their technology.  (Their technology only supports the real reason.)  There are also thousands of small companies out there who are creating double-digit growth in this economy, because they are focusing upon what is really important to customers.

So why aren’t you enjoying this same kind of strength? Could it be that you’ve been discounting your product whenever you received any pressure, so now customers know your product isn’t worth what you claim it is?  Could it be that you’ve fooled yourself into believing that customers only want to consider price, so you’ve under-engineered your product to appeal to the most fearful and financially-vulnerable people in our economy? Could it be that you have lost yourself in the battle to add features, functional performance, and “quality” to your products, while missing the most important aspects of emotional fulfillment that I discovered to be the real secret behind Alpha companies?  Could it be that you still believe that you can’t predictably manage and control the revenue side, so you’re lost in the cost-side management trap that is destroying American businesses?

Stop it.  Start making money now.  Forget the economy; it’s all in people’s minds anyway. (And I meant that literally: it’s all in their fear and the resulting lack of spending.) The secret is to change their minds by giving people a vision for what they can enjoy and who they will be perceived to be.  That’s how every Alpha company has gained the control they have over their competitors and over customer buying decisions.  End-users, competitors, retailers, and distributors follow their lead, because they “own” the decision process.

Since this is my blog, I will be direct.  If you don’t already own and have not already read “The Alpha Factor,” then do it this week.  It has the secret to creating more wealth than you have ever thought possible in as little as six months, even if you have not been able to grow your business in years.

As one Alpha has said it so poignantly, “Just Do It.”  Stop the whining and do something about it.  

CEOs of such publicly-owned companies are given incentives to drive up stock price quickly and predictably, which only asks them to drive that growth through cost-side management.  And, as was discovered throughout the Alpha Factor Project, using cost-side management to drive strategic decisions is death.  It always undermines the very things that created success in the first place.

Sam Walton made no bones about it.  He did not want to lose control of Wal-Mart to the stock market.  Even after they started selling stock over the counter, Sam’s vision and charisma enabled him to maintain control over the strategic direction of Wal-Mart right up to his death in 1992.

Compare that with the life of most CEOs today: shareholders and stock analysts really run their company, because stock price is the measurement of their success.  Their bonuses are based upon it and their future employment is based upon it.  CEOs who have to answer to the whims of the stock market cannot be leaders, because they have already defined themselves as followers.  Without exception, what killed the great Alphas was that they lost focus upon what really drove their success and instead allowed shareholders and stock analysts (or other outsiders) to drive strategic decisions.

Is it possible for a CEO of a publicly owned company to maintain Alpha leadership?  Certainly, but it takes top leadership that is focused upon the Alpha Innovation Pyramid (page 63 of The Alpha Factor) for driving new growth and will not compromise that focus to address the short-term, destructive demands of the stock market.
A leader either innovates to drive long-term sustainable success, or he is just managing the slow death of his company.

An article in The Wall Street Journal today by Janet Adamy and Anna Prior discussed the customer response to store closings.  Reminiscent of the customer outrage that saved Coca-Cola, when it made the terrible mistake with “New Coke,” we are seeing one of the strengths of an Alpha at work again through Starbucks.

One of the key benefits of becoming an Alpha company is that you can weather difficult times and even bad management decisions better than “normal” companies can.  That extends to the point that an Alpha’s customers will often save it from really bad mistakes.  We are witnessing this at work right now.   By having made themselves the customer expectation leader so that every other coffee shop wants to either emulate or overcome it, Starbucks has made itself a part of American life that people don’t want to have to do without.

According to the WSJ article, all across America — from major metropolises like Manhattan to small towns in Mississippi and Nebraska — Starbucks customers ranging from local neighbors to business owners and managers to city mayors are contacting Starbucks headquarters to lobby for their local stores.  Starbucks has made itself a draw for attracting people and businesses into a community and for attracting employees to businesses near a Starbucks store.

None of this would be happening, if Starbucks had simply managed its business to be a top moneymaking machine, as business schools teach us to do.  It has only been due to Starbucks’ focus upon fulfilling high-level customer emotional needs (self-satisfaction and personal significance) that it is enjoying this level of customer support.  Customer expectations from a coffee shop have changed significantly all across America due to Starbucks.  No cost-side management could ever have created this phenomenon.  Only by understanding and fulfilling these revenue-side customer needs has Starbucks made itself anything more than one more pretty good coffee shop.

Hopefully, Starbucks’ management will recognize that the reason behind their slowdown is not just “over expansion,” but also (and probably more importantly) a loss of focus upon continuing to raise customer expectations by driving them into higher and higher emotional fulfillment (again refer back to The Alpha Factor for a discussion on the core concepts of self-satisfaction and personal significance in driving purchase decisions).  There has been a noticeable decline in customer experience in Starbucks stores wherever I travel.  When I talk with store people, this focus seems to have been replaced with more focus upon new equipment.

Bad move.  Luckily, being an Alpha, they have time to get back to the focus that got them where they are.

I have been doing a lot of informal research and watching the business news pages, and the evidence for why you don’t want to be in the middle is everywhere.  Mercedes dealers (at least those who were strong dealers during the good times) are either even or ahead of last year, while almost everyone else including powerhouse Toyota is having a tough time.  And that’s not because Mercedes customers are wealthy enough to not worry about the economy.  Their real strength has been in customers trading up from other cars to buy a Mercedes, especially the new “C” Class.  Toyota, on the other hand, is seeing sales slide downward, not just in total numbers but also thrugh trading down from their best-selling Camry to the Corolla.

High end grocery stores are doing much better than their middle-of-the-road competitors.  Go into any Trader Joes, and there’s no shortage of customers.  I finally picked up a magazine to read as I waited in line the other day.  You can also go into the super discount stores that sell leftover products from other grocers, and the crowds are increasing.  It’s the middle guys that are gettin hurt.  The Wall Street Journal just had an article on July 18 about Safeway, that venerable giant, losing sales to lower-priced competitors.

The point is: if you want to do well in a recession (or even a non-recession like this one), you need to get out of the middle and either strengthen your Alpha Assets to become more of a leader or give up and commit yourself to being a scavenger or survival brand. If you stay in the middle, you will get hurt badly, if this non-recession carries on longer than a few months.

So, as politicians try to believe that being in the middle is the safest place to be this year, don’t take that advice for your company.  Commit one way or the other.

The problem is not just in the questions being asked, but it is also in the model your market researcher uses when accepting or analyzing the answers they receive. You would think that someone in behavioral sciences would understand that people don’t want to reveal core motivations… either to themselves or to others.  Most people are embarrassed to admit that they make their decisions based upon emotion more than upon logic.

It’s also a lot easier to avoid an argument about whether their final decision was the right one, when they can list several rational reasons for choosing what they did.  For instance, I caught myself doing this not long ago.  I had to choose between two suppliers for a business project.  One just made me trust him more.  When I told the other potential supplier that he did not get the business, he asked why.  Instead of going through all the reasons why the supplier I had chosen made me feel more “comfortable,” I told him that it was an issue of price.  The salesman readily accepted that answer, and I was off the phone and on to something important.

Market researchers run into the same thing.  Customers will give a list of rational reasons why they purchased something, but hidden near the end of the list (or waiting for a good researcher to pull it out of them) is the real core reason.  And it is always an emotional one.

I was at a group gathering a couple weeks ago, and a discussion started about baby carriers.  We were talking about how difficult it is to get past the obvious, superficial responses customers give for their answers, and one of the guys in the group said that he and his wife had just gone through the buying process for this kind of baby carrier.  We called her over and asked her why she chose the one she did after comparing several other products.  She gave a list of four or five reasons, including features, sturdiness, and a Consumer Reports article that recommended it.  She stopped, but we did not let her get away with just that.  She finally admitted that her sister had told her that this was the one to get.  She was far more influenced by the relationship she had with her sister and how going against her advice might affect that relationship than anything she saw in the product.  All the reasons she had listed were nothing but the “rationalizers” to make her emotional decision acceptable to other people.

In Alpha analysis, we delve far beyond the superficial, rational reasons consumers and customers give for their buying decisions.  In fact, we always have at least three different ways of testing whether they are telling us the truth built right into every questionnaire.  That’s the only way you can get to the real core decision factors that are being used.

And, since our goal is always to discover ways to change decision factors to be more in favor of our clients’ products or brands, it is critical that we not waste our clients’ time worrying about superficial things that really are not at the core of decisions.

I always believe that, if the research doesn’t give you something “new,” then it was probably a waste of money.

Would you agree?

How retailers react, and what you can do about it  

In an economic downturn, retailers react (just as consumers do) on the news of a potential downturn.  As soon as they see consumers pulling back in fear, they do not take a leadership role, but rather they start looking for ways to minimize risk.  Guess what the outcome is?  A downturn.  But that doesn’t have to hurt you, if you sell through them.  It can actually be the best time to strengthen your position and sales.

Let’s start by understanding what retailers do when they start to fear a coming economic slowdown.  The first and most obvious thing they do is put together a plan for pulling back rather than looking at how they might take control and make themselves the leaders now and after the downturn.  Much of what they do is self-destructive and also harms the marketers selling through them.

From the top down comes the order to cut costs, extend payment schedules (whether or not they actually negotiate longer terms), reduce in-stock inventories and increase special orders as a percentage of total sales (if they even offer such services), pressure their marketers to offer promotional discounting (that may or may not be passed along to end-users), become tougher on asking for other promotional allowances, and (occasionally) create new ways to get money from marketers without ever having to sell product.  That’s ugly.  But it’s the environment almost anyone selling through retail has to face. 

In making these cuts and “innovations,” they typically reduce the knowledge levels of their sales staff (the higher-paid people usually get cut first) and reduce the selection of product, despite the fact that broad selection is one of the most important things customers expect from a retailer.

Then they usually put even more emphasis on “store brands” that make them the exclusive place to go to get them.  This usually doesn’t have much real effect upon store traffic, but it does steal sales from their branded products (and makes for bad relations with the marketers who sell through them).

All of this is “functional” innovation that they do in an attempt to make themselves “leaner” and more attractive to customers.  Most of it backfires.  That’s why retailers are in such a mess today.  Unfortunately, most brand marketers have allowed themselves to be sucked into the trap of relying upon retailers to “sell” their product.  So when tough times come along, it’s time to stop being lazy and start thinking strategically.

So what can you do when faced with this?  Firstly, get excited.  This is an opportunity to make great gains for yourself both in overall sales and in gaining long-term support from your retailers.  It may even force you to innovate in ways you never would have without this impetus.

Assuming that you have not given up on retailers and have decided to take distribution into your own hands (a decision that many smaller marketers are choosing), there are many things you can do that will help you now and also after the economy improves.

Here are just a few ideas –

Innovate to go beyond your retailers:

Don’t allow yourself to be limited by the short-sightedness of your retailers.  Sometimes, they don’t want to be helped by their brand marketers.  You don’t have to stop selling through them to make yourself stronger and to increase your sales.  For instance…

1. Build your brand’s influence.  

·         Don’t count on retailers to sell your product.  If you are going to work through them, only allow them to be the place customers go to get it, not the place to learn about it.  The result will be immediate and future influence, which equals greater retailers support.  (Remember, retailers want to have products that attract customers.  Make yours their lead attractor.)

·         Make sure what you are “selling” is what customers really want.  (Beyond the obvious things they tell everyone, discover what they really wish they were getting.)

·         Start to drive higher customer expectations.  Once you understand what customers wish they were getting, you have the key to driving higher expectations.  If you innovate for “Significance” and “Satisfaction,” you will become the most influential brand.)

1. Find ways to make your product available in more places.  There are more places to sell product today than every before.  The internet has become just one new way to expand the availability and influence of your product.  
2. Go in the backdoor to increase sales through your retailers.  Many retailers offer online sales, so you could easily use your product’s website (and other information venues) to lead customers to retailers who have given you extraordinary commitment.

These are only a few ideas that have worked to overcome the resistance retailers put up.  The fact is that once end-users get past the initial time of holding back as fear of a downturn is created, they want to buy the products that will address their satisfaction and significance needs.  Retailers may stand in the way of you getting your product to those customers, so do what is needed to attract customers to what you offer.

If you combine that with innovating ways that make your retailers see you as they path to greater satisfaction and significance, you will be far stronger on the back side of a downturn than your competitors are.

In The Alpha Factor, I talk a lot about the fallacy of viewing the biggest as being the dominant, influenctial leader of a product or service category.  I use Ben & Jerry’s ice cream as one of the prime, highly-visible examples of the fact that smaller brands often are the real “Alpha’s” in a category, driving expectations and gaining a disproportionate share of the profits available in the category.

It’s not hard to look at the business press to see examples of this.  What’s harder to understand is how a small marketer can gain that kind of influence over much larger competitors.

Most of the answer to this is in attitude.  The smaller company that believes it is being overshadowed by a larger competitor creates a self-fulfilling prophesy.  Through its lack of self-confidence, it automatically looks for opportunities to maintain its “following” behavior.  It quickly falls into either a “me, too” product development mode or it combines that with a heavy dependence upon price promotion.  It doesn’t take long for everyone in the category (retailers, distributors, competitors, customers, the company’s own sales staff, and internal staff) to become convinced that the product or brand is just a follower with little hope of becoming much more.  It is discounted in everyone’s mind even before the company discounts the product on retail shelves.

Step #1 to changing that is to catch a vision for what is possible.  The research model I use with companies quickly defines a range of possible new visions for the category, based upon the unstated, unmet needs of customers already buying products in that category.  This research sees what people wish they could buy, how they wish they could buy it, and personal needs they wish were being met based upon the decision pyramid described in detail in The Alpha Factor.  Many of those needs are unstated, because people are either embarassed to admit the core emotional and personal needs they wish could be met or because they don’t believe this category could offer an answer to any of those things.

The result I have discovered of finding and then addressing these unstated, unmet needs is amazing.  Brands double or triple their share in short periods of time usually without discounting or even new product development.  Customers become more loyal.  And they even begin to “evangelize” about the product to others.  As long as the company recognizes the source of this new growth and customer loyalty, they can maintain this momentum for long periods.  The moment they lose sight of what actually caused the change, they begin to consciously or unconsciously undermine the things that created that growth and the product or brand begins to slide again.

Is it possible to catch the vision for what is possible without using my research model?  Certainly.  You just have to create a way of getting past the obvious answers that customers invariably give researchers and salespeople to discover what’s behind the decisions being made and what more they would really like to be offered.  Using the decision pyramid helps a lot.  It keeps you focused upon the emotional, personal factors that really matter. 

Just remember that customers are the only ones with the answers you need.  Your salespeople don’t know; they are being lied to by their customers who want them to believe price is everything.  Your retailers and distributors don’t know, because they want to believe that price is everything.  Your competitors don’t know, or they would already be addressing them.  Only customers know.  It’s just that they don’t always know that they know or believe that, if they reveal those answers, anyone would be able to answer them.

Short-term management has been the bane of the past decade, creating more harm to the future of American business than any short-term benefits that were generated.  Short-term management is defined by a focus upon driving continuing short-term profit results often without regard to the threat such decisions represent to the long-term growth potential of the company.   As discussed in The Alpha Factor, even short-term profit can be generated without undermining the long-term growth of a company, IF the tactics used to drive that reported profit had strategic value and were not going to weaken the company’s overall ability to generate strong future growth.

Unfortunately, the most debilitating version of short-term, cost-side management has been driven by the extraordinary demands of the stock market.  GE’s predicament and Jeffery Immelt’s bruises over not meeting a short-term predicted profit goal demonstrate just how dangerous the emotional, “I-don’t-care-how-they-do-it-as-long-as-they-do-it” mentality of stock analysts has become.  Here is a company that is strong, vibrant, and probably better poised than most to create a strong future, yet it was spanked by both the former CEO and the stock market because of a simple, unpredicted change.

Could it and should it have been predicted?  Possibly.  But the bigger point is the punishment administered for failure.  How can any CEO of a publicly-held company be expected to make strategic decisions in the face of such potential punishment for things that may be beyond control and have little or no long-term effect on the strength of the company?

Combine this with the excessive incomes being showered upon CEOs even of losing companies for hitting target stock price goals, which typically only provide profit to stock holders who have little or no long-term interest in the company, and you have a formula for disaster.

The entire “gambling” aspect of the stock market has become one of the most potent enemies of long-term success for American business.  My hope is and has been that the model for generating both long-term and short-term sustainable profit growth presented in The Alpha Factor will help provide a more rational and more valuable way of analyzing corporate stock value.

I pray for the day that may occur.