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Good Enough, Not Good Enough, and the Value of Brands

Good Enough, Not Good Enough, and the Value of Brands

Good Enough, Not Good Enough, and the Value of Brands

Executives who seek to avoid commoditization often rely on the strength of their brands to sustain their profitability—but brands become commoditized and de-commoditized, too. Brands are most valuable when they are created at the stages of the value-added chain where things aren’t yet good enough. When customers aren’t yet certain whether a product’s performance will be satisfactory, a wellcrafted brand can step in and close some of the gap between what customers need and what they fear they might get if they buy the product from a supplier of unknown reputation. The role of a good brand in closing this gap is apparent in the price premium that branded products are able to command in some situations. For similar logic, however, the ability of brands to command premium prices tends to atrophy when the performance of a class of products from multiple suppliers is manifestly more than adequate.

When overshooting occurs, the ability to command attractive profitability through a valuable brand often migrates to those points in the value-added chain where things have flipped into a not-yet-good-enough situation. These often will be the performance-defining subsystems within the product, or at the retail interface when it is the speed, simplicity, and convenience of getting exactly what you want that is not good enough. These shifts define the opportunities in branding.

For example, in the early decades of the computer industry, investment in complex and unreliable mainframe computer systems was an unnerving task for most managers. Because IBM’s servicing capability was unsurpassed, the brand of IBM had the power to command price premiums of 30 to 40 percent, compared with comparable equipment. No corporate IT director got fired for buying IBM. Hewlett-Packard’s brand commanded similar premiums.

How did the brands of Intel and Microsoft Windows subsequently steal the valuable branding power from IBM and Hewlett-Packard in the 1990s? It happened when computers came to pack good-enough functionality and reliability for mainstream business use, and modular, industry-standard architectures became predominant in those tiers of the market. At that point, the microprocessor inside and the operating system became not good enough, and the locus of the powerful brands migrated to those new locations.

The migration of branding power in a market that is composed of multiple tiers is a process, not an event. Accordingly, the brands of companies with proprietary products typically create value mapping upward from their position on the improvement trajectory—toward those customers who still are not satisfied with the functionality and reliability of the best that is available. But mapping downward from that same point—toward the world of modular products where speed, convenience, and responsiveness drive competitive success—the power to create profitable brands migrates away from the end-use product, toward the subsystems and the channel.[14]

This has happened in heavy trucks. There was a time when the valuable brand, Mack, was on the truck itself. Truckers paid a significant premium for Mack the bulldog on the hood. Mack achieved its preeminent reliability through its interdependent architecture and extensive vertical integration. As the architectures of large trucks have become modular, however, purchasers have come to care far more whether there is a Cummins or Caterpillar engine inside than whether the truck is assembled by Paccar, Navistar, or Freightliner.

Apparel is another industry in which the power to brand has begun to migrate to a different stage of the value-added chain. As elsewhere, it has happened because a changed basis of competition has redefined what is not good enough. A generation ago most of the valuable brands were on the products. Levi’s brand jeans and Gant brand shirts, for example, enjoyed strong and profitable market shares because many of the competing products were not nearly as sturdily made. These branded products were sold in department stores, which trumpeted their exclusive ability to sell the best brands in clothing.

Over the past fifteen years, however, the quality of clothing from a wide range of manufacturers has become assured, as producers in low-labor-cost countries have improved their capabilities to produce high-quality fabrics and clothing. The basis of competition in the apparel industry has changed as a consequence. Specialized retailers have stolen a significant share of market from the broad-line department stores because their focused merchandise mix allows the customers they target to find what they want more quickly and conveniently. What is not good enough in certain tiers of the apparel industry has shifted from the quality of the product to the simplicity and convenience of the purchasing experience. Much of the ability to create and maintain valuable brands, as a consequence, has migrated away from the product and to the channel because, for the present, it is the channel that addresses the piece of added value that is not yet good enough.[15] We don’t even question who makes the dresses in Talbot’s, the sweaters for Abercrombie & Fitch, or the jeans at Gap and Old Navy. Much of the apparel sold in those channels carries the brand of the channel, not the manufacturer.[16]

[14]This would suggest, for example, that Hewlett-Packard’s branding power would be strong mapping upward to not-yet-satisfied customers from the trajectory of improvement on which its products are positioned. And it suggests that the HP brand would be much weaker, compared with the brands of Intel and Microsoft, mapping downward from that same point to more than satisfied customers.

[15]We are indebted to one of Professor Christensen’s Harvard MBA students, Alana Stevens, for many of these insights, which she developed in a research paper entitled “A House of Brands or a Branded House?” Stevens noted that branding power is gradually migrating away from the products to the channels in a variety of retailing categories. Manufacturers of branded food and personal care products such as Unilever and Procter & Gamble, for example, fight this battle of the brands with their channels every day, because many of their products are more than good enough. In Great Britain, disruptive channel brands such as Tesco and Sainsbury’s have decisively won this battle after first starting at the lower price points in each category and then moving up. In the United States, branded products have clung more tenaciously to shelf space, but often at the cost of exorbitant slotting fees. The migration of brands in good-enough categories is well under way in channels such as Home Depot and Staples. Where the products’ functionality and reliability have become more than good enough and it is the simplicity and convenience of purchase and use that is not good enough, then the power to brand has begun migrating to the channel whose business model is delivering on this as-yet-unsatisfied dimension.
Procter & Gamble appears to be following a sensible strategy by launching a series of new-market disruptions that simultaneously provide needed fuel for its channels’ efforts to move up-market, and preserve P&G’s power to keep the premium brand on the product. Its Dryel brand do-it-yourself home dry cleaning system, for example, is a new-market disruption because it enables individuals to do for themselves something that, historically, only a more expensive professional could do. Do-it-yourself dry cleaning is not yet good enough, so the power to build a profitable brand is likely to reside in the product for some time. What is more, just as Sony’s solid-state electronics products enabled discount merchandisers to compete against appliance stores, so P&G’s Dryel gives Wal-Mart a vehicle to move up-market and begin competing against dry cleaning establishments. P&G is doing the same thing with its introduction of its Crest brand do-it-yourself teeth whitening system, a new-market disruption of a service that historically could only be provided by professionals. We thank one of Professor Christensen’s former students, David Dintenfass, a global brand manager at Procter & Gamble, for pointing this out to us.

[16]As we have shared these hypotheses with students, some of the more stylishly dressed among them have asked whether this applies also to the highest-fashion brands, such as Gucci, and in product categories such as cosmetics. Those who know us probably have observed that dressing ourselves in fashionable, branded merchandise just isn’t a job that we have been trying to get done in our lives. We confess, therefore, to having no intuition about the world of high fashion. It will probably persist profitably forever. Who are we to know?