Fat, Dumb and Happy

Volume 8 Letter 4

Some of you may remember IBM back in its heyday when they were selling Selectric typewriters and big main frame computers. In the late 1980’s IBM recorded the highest profit of any corporation ever. By the early 1990’s they came crashing back to earth and the crater left shocked the business world and cost John Ackers his job as CEO.

Similarly, Levi Strauss pushed sales over the seven billion mark in 1996. Reaching seven billion in sales came after a long run of growth that saw sales revenue double in ten years. Then, like IBM, Levis sales rapidly declined by 35% over the next four years down to 4.6 billion in 2000. Levis market share correspondingly dove from 31% to a meager 14% and the company wiped approximately six billion off their market cap.

In an article written by Olson, Van Bever and Verry in HBR March 2008, the authors illustrate how many great companies have seen long run growth suddenly nosedive. Companies like 3M, Xerox, Caterpillar, Apple and many more have all gone into market share free fall at some point in time. One could conclude that in each case the market turned sour and they were just helpless victims of economic circumstances – but not true! After examining over fifty companies that went through a major market share melt down the authors concluded that 87% of the time the reason for the rapid descent was within management’s control!

The number one cause of crashing was what the authors called” Premium Position Captivity”. Others would call it being overconfident or “Fat Dumb and Happy” syndrome. Companies that dominate at the premium end of the market can become insulated against market changes longer than can their competitors. In the case of IBM, products had not kept up with the market and customers were complaining that new computer models were taking too long to come to market. Over at Levis, revenues continued to grow even as relationships with their distributors started to sour. National retailers like the Gap started to introduce their own lines of jeans both at the high end (designer jeans) and the low end (house brands). When Levis finally woke up they found themselves with a product line out of step with both ends of the market and an expensive retailing strategy to boot. Is it possible Levis could have seen this coming before growth flat lined? Their top marketing executive at the time conceded “we didn’t read the signs that all was not well”. So what are those signs and what can you look out for?

    • Losing market share: Are you losing market share to non premium or upstart competitors in smaller sub markets?

 

    • Price pushback: Are key customers balking at paying premium prices for product upgrades and enhancements?

 

    • Denial: Is your management team in denial that non premium players operate in the same market as does your business? Do they dismiss the idea that low entry players will be able to move into the upper end markets?

 

    • Ignoring non core markets: Does your company fail to track shifts in customer behavior in non core markets?

 

  • Excluding competitor data: Are low end competitors excluded from your tracking data because they are dismissed from the world of “real” competitors?

When your company is in a growth stretch, be diligent and watch carefully for the early signs of decline. Take note when new product innovations fail to protect and build price premiums and when brand strength starts to weaken in any market. This is when you are most vulnerable to low cost competitors moving into the middle market space and premium players attacking from above.

As you contemplate this keep in mind that a market fall is almost always fatal. The odds of a full market share recovery decrease with the passage of time. Next time you’re feeling overly content and confident, ask yourself…Are we Fat Dumb and Happy?

1. When Growth Stalls, Olson, Van Bever and Verry HBR March 2008 PP 50 – 61
2. www.businessweek.com/1996/30/b348534.htm Book Review “An Unconventional View of What Went Wrong at IBM”, D. Quinn Mills and G. Bruce Friesen Harvard Business School Press

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