Golden Stars

Switching costs. A cost that most of us never consider when buying something but so important to companies. How are companies able to win us over and retain us? A few companies have figured out this magical formula out and by doing so, have become industry behemoths.

A great example of an industry behemoth is outlined in my classmates Zain Ali’s blog, “Apple Using Proprietary Technology to Maximize Profit”. In his blog, he mentions that Apple uses proprietary technology to their advantage. By having a completely different software, charger, applications, Apple has created an ecosystem that revolves around themselves. The underlying point here is that the switching cost is very high. Once people are in Apple’s eco-system it’s hard to leave because of the different software, charger and applications. Companies that can create high switching costs are more likely to generate more profits because of the “locked in” customer.

Another company that has created high switching costs for themselves is Starbucks. Over the years, Starbucks has not only differentiated themselves from the rest of the industry by making specialty drinks, they have also created a loyalty program that “locks in” customers. Through the collection of stars, customers can redeem free drinks and food. Furthermore, Starbucks has their own online app where customers can pay through their own phone using money preloaded on their Starbucks app. Customers can also skip the wait of the line by ordering their drinks on the app. With the introduction of the Starbucks app, customers who are in the Starbucks ecosystem find it hard to leave because of what they’ve already invested into the Starbucks ecosystem. Customers who have alternative options are faced with a dilemma. Are they willing to pursue the cheaper/better option and forgo all the stars they accrued over the months or are they willing to cough up the additional thirty cents to maintain the benefits they are currently enjoying with Starbucks? More often then not, customers choose the later. Customers choose the later because Starbucks has been able to create high switching costs for themselves.

There is a positive correlation between switching costs and profit. Because companies can retain their customers, companies have the leverage in a typical consumer market. Therefore, when determining a company’s success, high switching costs are usually a part of the equation. Apple and Starbucks are just two prime examples of companies that have been able to create high switching costs for themselves.

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Greenberg, A., Barrett, B., Moynihan, T., McHugh, M., Hempel, J., & Pierce, D. (2016). The FBI Now Says It May Crack That iPhone Without Apple’s Help.WIRED. Retrieved 30 October 2016, from https://www.wired.com/2016/03/fbi-now-says-may-crack-iphone-without-apples-help/

High Switching Costs. (2016).News.morningstar.com. Retrieved 25 October 2016, from https://news.morningstar.com/classroom2/course.asp?docId=144752&page=4&CN=

Love Starbucks? You’ll Hate The New Starbucks Rewards Program. – 91.7 The BOUNCE. (2016). 91.7 The BOUNCE. Retrieved 30 October 2016, from http://www.thebounce.ca/2016/02/23/love-starbucks-youll-hate-the-new-starbucks-rewards-program/

Why Starbucks is winning at loyalty. (2016). Marketingmag.ca. Retrieved 25 October 2016, from http://www.marketingmag.ca/brands/why-starbucks-is-winning-at-loyalty-152974

The power of being first

The power of being first. By coming in first, companies not only get bragging rights but also a whole set of advantages. Brand name recognition, economies of scale and switching costs are all perks that come by being the first to bring a product or service to a market. Kleenex is a great example on how brand name recognition has allowed their brand to become synonymously associated with normal everyday products.

However, like my peer Claire Lee indicated in her blog, “A Goodbye to a Legend”, to maintain a company’s #1 status requires flexibility. Blackberry is an excellent example of how a company that enters into a new market meets its downfall through ignorance. Blackberry had a great produ

ct but failed to innovate as consumer trends shifted. Claire Lee says “While other companies produced products to satisfy this demand, Blackberry was solely focused on their value proposition- security and productivity- to keep their existing customers.” This rings true for many other companies that had great services/products but failed to change with the consumer.

Kleenex on the other hand was able to innovate as trends changed. By being the first into a market, and following consumer trends, Kleenex was able to avoid Blackberry’s fatal mistake. Kleenex has now been genericized to refer to any facial tissue regardless of brand and the Oxford dictionary now has a definition for Kleenex: “An absorbent disposable paper tissue.” How has Kleenex become so popular that we now refer to any facial tissue as such? It was by being the first one in the market and by constantly finding other ways to engage with the consumer.

2008 Rank: 74
2008 Brand Value (Millions): $4,636
Parent Company: Kimberly-Clark (KMB)
To ward off generic rivals, Kleenex has been advertising heavily—from TV spots to an Internet site that lets consumers create personalized Kleenex boxes.

Kleenex was the Western world’s first facial tissue. It was introduced in 1924 by Kimberly-Clark and marketed as the first hygienic, disposable cleansing cloths. In 1932, the Kleenex began running ads with their new phrase “The handkerchief you can throw away!” By associating themselves to a handkerchief, people began to use the word Kleenex to refer to any disposable facial tissue. Additionally, Kleenex most recently ran an advertisement called “Unlikely Best Friends” which displays the similarities between a man in a wheelchair and Chance, a dog who lost the use of its legs. This heart wrenching commercial was shared 138,000 times in a week and made it so that if you didn’t have a box of Kleenex now, you’ll feel like you’ll need one. Kleenex knew this and made the ad’s tagline to be “Kleenex: Someone Needs One.”

By being first to provide a product to a market, Kleenex was able gain an advantage that has kept them ahead of their competitors. However, Kleenex was able to maintain its advantage by constantly finding other ways to engage with its consumers.

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Bellis, M. (2016). The History of Kleenex: It Wasn’t Meant to Blow Your Nose.About.com Money. Retrieved 10 October 2016, from http://inventors.about.com/od/kstartinventions/a/Kleenex.htm

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Target’s Failure in Canada

A net loss of 2 billion. That’s what Target’s mistake ended up costing them. This was supposed to be Target’s big leap to the Great White North and their first attempt at international expansion. However, Target fell short in their quest and withdrew from Canada within two years of its launch. There are many factors that may have attributed to Target’s demise but the main reason why I think they failed was because they had a poorly executed business model for Canada.

TORONTO, ON – FEBRUARY 24: Detail Shots of new Target store at East York Center. Rene Johnston/ Toronto Star (Rene Johnston/Toronto Star via Getty Images)

In 2011, by announcing their purchase of 220 leases from Zeller Inc. for $1.825 billion, Target began their entry into Canada. This move was heralded as genius by many because it saved them both time and money on building their own stores. However, this very move was the main reason why Target never went off in Canada. The locations Target inherited were locations that weren’t frequented by Target’s main customer: the middle class. With bad locations and unappealing stores, Target dug itself into a hole too deep to come out.

By opening so many stores in such a short period of time, Target failed to provide the necessary inventory for the Canadian stores. Shelves ended up being empty and stores were low on products to sell. For customers, there was no incentive to go to a bad location, and buy items that never ended up getting restocked. As this problem persisted, customers found alternatives such as Walmart to satisfy their needs.

If target had gone back to the basics and re-evaluated themselves on the business model canvas, problems that ended up costing them 2 billion dollars could have been avoided. They would have realized that buying the leases off a company that was slowly dying off in Canada would not been in the best interests of the company even though it saved them money in the short run. Additionally, if the operations manager had planned the expansion into Canada better, the issue of shortages would not have been a problem. However, Target didn’t plan the expansion as well as they should have and ended up slinking out of Canada defeated and embarrassed.

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Bibliography

Looking beyond Target | Canadian Grocer. (2016). Canadiangrocer.com. Retrieved 1 October 2016, from http://www.canadiangrocer.com/worth-reading/what-went-wrong-for-target-canada-48093

Wahba, P. (2015). Dumpy locations, empty shelves and poor pricing compared to Wal-Mart doomed Target’s efforts in Canada.. Fortune. Retrieved 1 October 2016, from http://fortune.com/2015/01/15/target-canada-fail/