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Thursday, September 19, 2019

The Origin of Brands
by Al & Laura Ries, New York: HarperCollins Publishers Inc., 2004

(page 5)
The Role of the Name
...Names do matter. Depending on the category, the name alone can represent the primary reason for the brand's success.

A company might spend hundreds of millions of dollars to develop a new product and then give that new product a brand name that almost guarantees failure. Innovation alone is never enough.

Along with innovation, a company needs marketing to assure the brand's eventual success and survival. The heart of a good marketing program is a great name.

(page 12)
Most New Brands Don't Stand a Chance
Each year consumer-product makers in the United States introduce more than thirty thousand new products and services. That's thirty thousand opportunities to introduce another Southwest Airlines, another Swiffer, another Google, another Gatorade.

...The vast majority of these new products and services (and the brands that are hung on them) don't stand a chance to become big brands because they were introduced to serve a market rather than to create a market.

(page 13)
Something Is Wrong with Our Predictions
A recent Nielsen BASES and Ernst & Young study put the failure rate of new U.S. consumer products at 95 percent and new European consumer products at 90 percent.

Nor are our successes much to brag about either. An analysis done a few years ago found that fewer than two hundred of the hundreds of thousands of new products introduced in a ten-year period had sales of more than $15 million a year, and only a handful produced sales of more than $100 million.

(page 14)
A New Category Needs a New Name

(page 17)
What's the size of the market?

That's the first question normally asked before starting a branding program. It's also the wrong question to ask.

Branding opportunities do not lie in the pursuit of existing markets. Branding opportunities lie in the creation of new markets.

(page 18)
To build a new brand, you must overcome the logical notion of serving a market. Instead you must focus on creating a market.

Consider the world's ten most valuable brands and their estimated values, as determined by Interbrand, the leading brand-valuation company.

No. 1: Coca-Cola ($70 billion) This is an astounding number because it is almost three times the physical assets of the Coca-Cola Company, which are on the books at $24.5 billion.

No. 2: Microsoft ($65 billion)

No. 3: IBM ($52 billion) What built the IBM brand? In a word, the mainframe computer. IBM wasn't the first company to introduce a commercial computer. (Remington Rand was the first with its Univac brand, which was introduced in 1951.)

No. 4: General Electric ($42 billion)

No. 5: Intel ($31 billion)

No. 6: Nokia ($29 billion)

No. 7: Disney ($28 billion)

No. 8: McDonald's ($25 billion)

No. 9: Marlboro ($22 billion)

No. 10: Mercedes Benz ($21 billion) Today, Mercedes is one of the most prestigious automobile brands in the world, although the company is doing its best to destroy that prestige. First by merging with a down-market company, Chrysler, and then by introducing a series of down-market Mercedes models.

(page 22)
The Irrelevance of Market Size
What was the size of the cola market the day Coca-Cola was launched?

What was the size of the sixteen-bit personal-computer operating system market the day Microsoft MS/DOS was launched?

What was the size of the electric-light bulb market the day Thomas Edison introduced the history-making invention?

What was the size of the microprocessor market the day the Intel 4004 was launched?

What was the size of the motion-picture animation market the day Walt Disney's Mickey Mouse appeared for the first time?

What was the size of the fast-food hamburger market they day the McDonald brothers opened their first unit?

What was the size of the masculine-cigarette market the day Marlboro was repositioned as a male-oriented brand?

What was the size of the automobile market the day Karl Benz introduced his first vehicle?

In all of these eight cases, the size of the market, for all practical purposes, was zero. Eight of the world's ten most valuable brands were created by divergence from an existing category.

(page 23)
The Power of a Narrow Focus
The two remaining cases (IBM and Nokia) are the exceptions to the general rule that brands are built by divergence. But these two cases do demonstrate another branding principle. You can win by doing the right thing or you can win when you competitor does the wrong thing.

In the case of IBM and Nokia, their competitors did the wrong things.

(page 24)
The Market versus the Mind
Critical to making correct branding decisions is the ability to differentiate between the market and the mind.

The primary objective of a branding program is never the market for the product of service. The primary objective of a branding program is always the mind of the prospect. The mind comes first; the market follows where the mind leads. The mind doesn't think markets. The mind thinks categories. In this respect, the visual is only a means to an end. In Marlboro's case the end is a category the mind identifies as "masculine cigarette.

Sure, ultimately you would like your brand to dominate the entire market, as the Marlboro brand eventually did. But the way to do this is to start small, not big.

The fist question to ask is, does a category exist in the mind called "masculine cigarette? The second question to ask is, can you create a brand that could start a divergence from the mainstream cigarette market? A divergence that would eventually create a "masculine cigarette category?

(page 25)
The Process Does Not Depend on the Market
Dozens of masculine cigarette brands may have been on the market the day that Marlboro was relaunched as a masculine brand. What matters is not what's on the market. What matters is what's in the mind. Is there an open hole or position for a new category?

(page 30)
If you think of "the customer as a single identity (and many companies do), your instincts are to satisfy "the customer's every wish. As a result, a laptop computer needs to be full-featured, yet ultralight. In other words, you put yourself right in the mush middle where there is no market.

The "sweet spot of a market is an illusion that will soon give way to multiple sweet sports. So which spot do you want your brand to occupy? The top of the test tube or the bottom of the test tube? Trying to occupy both spots leads directly to the mushy-middle.

(page 36)
Two brands cannot occupy the same position.

(page 53)
Swiss Army Knife Thinking
Every macho male has one, but when was the last time you saw someone actually use the scissors on a Swiss Army knife to cut something? Or the screwdriver to screw something? Or the tweezers to tweeze something?

Many "Swiss Army knife products are on the market. They get a lot of publicity, they capture the public's imagination, they get bought by the millions, and then they wind up in dresser drawers where they sit idle for decades.

Swiss Army knife thinking is rampant up and down the corridors of corporate America.

What are the three biggest, most exciting, most dynamic industries in America? Most people would probably say television, computers, and the Internet. Great, why not combine the Internet with your television set as well as your computer? And so the cry goes up, interactive TV, the wave of the future.

Some wave.

(page 54)
Interactive TV, Microsoft Version
In 1997, Microsoft bought WebTV Networks for $425 million and has since poured more than a half a billion dollars into the venture. Results have been dismal. Today, WebTV (whose name has been changed to MSN TV) has about 1 million subscribers, a trivial number compared to the more than 100 million TV sets in use.

Convergence has clearly become an obsession with Microsoft. "Has William H. Gates become the Captain Ahab of the information age? asked the New York Times. "Mr. Gate's white whale remains an elusive digital set-top cable box that his company, the Microsoft Corporation, is hoping will re-create the personal computer industry by blending the PC, the Internet and the television set into a leviathan living-room entertainment and information machine.

Also in 1997, Microsoft invested $1 billion for 11.5 percent of Comcast Corporation, at the time the nation's fourth-largest cable operator. According to the New York Times, "Comcast will become a seedbed for Mr. Gates to test his vision of a converging world.

But that was just the start. In 1999, Microsoft pumped $5 billion into AT&T and secured a contract to install Microsoft TV software in as many as 10 million AT&T set-top boxes. Not a single box made it to the top of a television set serviced by an AT&T cable system, and since AT&T is now out of the cable business, the contract is just another convergence dead end.

Microsoft keeps trying. After the lukewarm reception of WebTV, Microsoft moved on to UltimateTV. Putting a clock together with a radio is nothing compared to what Microsoft has in mind for today's couch potato.

UltimateTV consists of a DirectTV satellite subscription ($22 to $83 a month), a special rooftop dish capable of pulling in two channels at once ($50/month, plus $200 installation), a thirty-five-hour satellite receiver and digital video recorder ($399), and a subscription to UltimateTV ($9.95 a month). You save money, of course, by using your own television set.

What can you do with UltimateTV? Everything, it's the ultimate in television. You can record and store up to thirty-five hours of programming. You can pause and instant-replay live TV. You can watch and record two shows at once. You can send email and chat online while watching TV.

Fred Allen once said that television is 85 percent confusion and 15 percent commission. UltimateTV may turn out to be 100 percent confusion. "If programming the clock on the VCR gives you a migraine, reported Fortune magazine, "UltimateTV will trigger a full nervous breakdown.

(page 72)
Steve Jobs had the right take on the media center. When asked if Apple Computer would introduce a product like that, he said that it would make as much sense as Apple introducing a computer also capable of making toast.

(page 90)
Time Flows in One Direction Only
Generations ago, life was simpler. Most people lived on farms and had only a few items of clothing, a few appliances, and a few bottles of stuff inside their medicine cabinets, if they had a medicine cabinet. Since then we have had generations of divergence, and life has gotten a lot more complicated.

If convergence was really a trend, it would mean that hundreds of years of divergence have suddenly come to a halt and life is going to get simpler.

Fat chance.

Life never gets simpler. It only gets more complicated. Whatever tree you are looking at, you can be sure of one thing. In the future, there will be more branches, more categories and more brands.

Knowledge is power. Knowing that categories will eventually diverge is enormously useful to any marketer looking for an opportunity to launch a new brand.

(page 104)
How do you compete with a software powerhouse like Microsoft? You don't do it by emulating Microsoft, by packaging your products in a bundle, as Lotus tried to do with SmartSuite. Bundling only works for a leader with monopolistic powers. Rather, you look for ways to branch off from the mainstream.

Intuit Inc. accomplished this with three brands, all of which became leaders in their fields. Quicken (personal finance), QuickBooks (small-business accounting), and TurboTax (tax preparation.)

Today Intuit does $1.4 billion in annual sales with net profit margins in excess of 10 percent. On the other hand, Microsoft Money has a miniscule market share.

(page 105)
When we suggested to IBM management that they use a different name for their new personal computer (the IBM PC), we were told, "The product is too important to IBM's future not to use the IBM name. Regrettable result: IBM lost money on personal computers for twenty-one years in a row. Last year for the first time, IBM made a small profit on personal computers.

(page 108)
Divergence follows a pattern. Early on, the establishment scoffs at the possibility of a competitive threat to their powerful brands. It wasn't ABC, CBS, or NBC that pioneered cable television. It was John and Margret Walson, owners of an appliance store in Mahanoy City, Pennsylvania.

It wasn't Time Warner, Comcast, or Cablevision that pioneered satellite television. It was outsider Hughes Electronics that introduced DirectTV, the first direct-broadcast satellite television system.

(page 111)
In a story that has been told many ties, General Motors became the leading car company by segmenting the market into five different price categories: Chevrolet, Pontiac, Oldsmobile, Buick, and Cadillac. "A car for every purse and purpose was the corporate motto.

Divergence thinking made General Motors the dominant automobile manufacturer.

But convergence thinking got General Motors into trouble. Cheap Cadillacs and expensive Chevrolets were only two of the many mistakes made by General Motors that muddied the differences between the company's five brands.

If General Motors had practiced divergence thinking, they would have increased the differences between the brands. Chevrolets would have gotten cheaper and Cadillacs would have gotten more expensive.

If GM had thought that way, today you might have been able to buy cheap Chevrolets made in China and expensive Cadillacs that have as much prestige as a Mercedes. (It's a mistake to think a domestic product can't have the prestige of an imported product. It can, but not at a cheaper price.)

Making Chevrolet cars cheaper and Cadillac cars more expensive would have left more room in the middle for Pontiac, Oldsmobile, and Buick. It also would have made Saturn (an expensive mistake) superfluous.

(page 112)
Face it. Convergence is mainstream thinking. Divergence is not. Hence the need for a book like this. Opportunities never reside in the mainstream. The always reside on the edges where the competition is weak or nonexistent.

(page 125)
Divergence in Department Stores
Years ago, department stores ruled the retail world. Every city had a department store king. Macy's in New York, Marshall Field's in Chicago, Rich's in Atlanta. Then there were the national chains: Sears, Montgomery Ward, JCPenny.

Everyone knows traditional department stores are in trouble. And everybody thinks they know what caused that trouble. They didn't move out to the suburbs with their customers. They didn't keep up with the latest fashions. They forgot about service and focused on sales.

What department stores did wrong is trivial compared to what the competition did right. Like coffee shops, department stores were eaten alive by divergence. Every department spawned a narrowly focused national brand that rapidly moved to dominate its category.

The athletic shoe department became Foot Locker.

The baby department became Babies "R" Us.

The bedding department became Bed, Bath and Beyond.

The book department became Barnes and Noble.

The casual-clothing department became The Gap.

The consumer-electronics department became Best Buy.

The furniture department became Rooms-to-Go.

The housewares department became Crate & Barrel.

The jewelry department became Kay Jewelers.

The leather coat department became Wilson's Leather.

The lingerie department became Victoria's Secret.

The makeup department became Sephora.

The mattress department became Sleepy's.

The men's suit department became Men's Wearhouse.

The pet department became PetsMart.

The plus-size department became Lane Bryant.

The salon became Supercuts.

The shoe department became Famous Footwear.

The sports department became Sports Authority.

The young-adult department became Abercrombie & Fitch.

The toy department became Toys "R" Us.

The clearance department in the basement, of course, became Wal-Mart, the world's largest retailer.

It's interesting, too, that almost all of these department store branches were started by individual entrepreneurs, not large companies. Sam Walton started Wal-Mart with a single store in Arkansas. Donald Fisher founded The Gap with a single store in San Francisco, selling only jeans and music. Charles Lazarus started Toys "R" Us with one store in Washington, DC.

Big companies don't usually have the patience or the vision to see opportunities in branching off. Big companies want to go after existing markets, the larger the better.

Sam Walton started with a Ben Franklin franchised dime store in Newport, Arkansas, in 1945. By 1962, Walton owned fifteen Ben Franklin stores operating under the Walton 5&10 name.

He only opened a Wal-Mart Discount City in Rogers, Arkansas, that same year because Ben Franklin management rejected his suggestion to open discount stores in small towns.

(What? Big company management misses an opportunity to own what will turn out to be the most successful retail brand in history? Sure, it happens all the time.)

(page 127)
Manufacturing, once thought to be the heart of a company's operations, is the latest corporate activity to experience outsourcing. Nike is the obvious example, but the practice is widespread. Well over half of all products are not made by the company whose brand is on the package.

(page 134)
Have there been convergence milk products? Well, chocolate milk is one. Like virtually all convergence products, chocolate milk exhibits three characteristics: (1) It captures the consumer's imagination, especially if that consumer is six years old. (2) It represents a small segment of the milk market. Skim milk outsells chocolate milk ten to one. (3) Its primary benefit is convenience. You don't have to mix the chocolate syrup with the milk. Note, however, you give up the taste benefit of being able to adjust the amount of syrup in the glass, which is why Hershey's chocolate syrup is a big brand and chocolate milk is not.

TiVo, the Swiss Army knife, the cellphone/PDA/camera, and chocolate milk are all the same. They combine the "wow factor with convenience and small sales. Convergence will never die in spite of its lack of success in the marketplace. The wow factor will keep it alive and well for decades to come.

Skim milk, which ranks at the bottom of the wow scale, is a good example of the discipline of divergence. You can make more money by taking something (cream) out of a product (milk) than you can by adding something (chocolate syrup) to the same product.

In food distribution, you are also beginning to see signs of a major divergence between traditional food and a new category that might be called natural, organic, or healthy food.

The dominant brand in the latter category is Whole Foods Market. With 140 stores in twenty-five states, Whole Foods is the world's No. 1 natural-food chain. Last year sales grew 17 percent, while sales of the three largest conventional supermarket chains (Kroger, Albertson's, and Safeway) collectively were down 2 percent.

(page 136)
Think Category First and Brand Second
Unless you can define a new brand in terms of a new category, the new brand is unlikely to be successful.

(page 140)
That's why a company that devotes all its efforts to "satisfying its customers is a company headed for trouble. Consumers don't know what they want until they are given a choice.

It's marketing that creates opportunities for introducing new categories. It's not new categories that create opportunities for marketing programs to flourish.

Yet most companies are passive bystanders in marketing's "survival of the fittest. They think they will win by producing great products and surrounding those great products with great customer service.

Not true. The winners are those companies that introduce new brands that create new categories. The Gatorades, not the PowerAdes. The Mountain Dews, not the Mello Yellows. The Dr. Peppers, not the Mr. Pibbs.

(page 152)
Once a brand becomes strongly identified with a category in the mind, the brand can't easily be moved.

The dynamics of divergence suggest a way out of this dilemma. Since you know that related categories are going to constantly move apart, the best way to dominate two different branches is with two different names.

(page 159)
Also consider wine. There are two basic kinds of wine: red wine and white wine. There's also rose wine, the best of both vineyards. How much rose, the wine in the mushy middle, do you suppose is sold? Not very much.

A local supermarket chain is feeling the competition from the warehouse stores (Costco and Sam's Club) so they are running an advertising campaign that puts them right in the middle. The theme: "Supermarket nice. Warehouse price."

Logically the campaign makes sense, but mentally, which branch do you put the chain on?

There are no missing links in nature, and there are no truly successful brands in the mushy middle either.

(page 161)
Being first doesn't automatically mean your brand will become the leader in a new category. It only gives you a license to do so. If you're first, your brand starts off as the leader since no other brands are trying to occupy the same branch.

Here's where evolution comes in. Your brand needs to evolve to maintain its leadership. In this respect, you need to be protective of your brand and be especially vigilant when competitors threaten your position.

Sales, however, don't matter nearly as much as perception. To become successful, your brand needs to establish the perception of leadership in the minds of consumers.

(page 164) Fortune Favors the First
…Firstness creates leadership. If you brand is the only brand in the category, your brand must be the leader. And when competition arrives, leadership creates the perception of betterness for your brand.

…Two things work in favor of the first brand into the mind. First is the perception that the leading brand must be "better. It's axiomatic that the best product or service wins in the marketplace. Since the first brand into the mind is automatically the leader (there are no other brands) the first brand will tend to maintain its leadership. (It blocks the sunlight from competing brands.)

Second is the perception that the first brand is the original. Every other brand is an imitation of the original. "The real thing applies only to Coca-Cola, not to me-too brands like Pepsi-Cola and Royal Crown cola.

Even if Pepsi did outsell Coca-Cola someday (an unlikely occurrence), Pepsi-Cola would never be perceived as the real thing.

(page 165)
First Mover in the Mind
Business books often denigrate what they call "the first-mover advantage and they're right. There is no advantage to being the first mover in the marketplace unless you can use that opportunity to also become "the first mover in the mind.

…Branding occurs only in the mind and has no physical reality. Being first in the marketplace is a physical first and does not necessarily lead to a mental first.

(page 166)
When you're first in the mind, your brand creates a powerful emotional connection with consumers. In contrast, when you're first in the marketplace, your brand is just another brand.

Losing Its Leadership Doesn't Destroy a Brand
Even if the first brand into the mind loses its leadership, the brand doesn't lose its emotional connection with consumers.

…Hertz isn't the leading rent-a-car brand anymore (Enterprise is) but Hertz still resonates with car-rental customers in a way that Avis, National, and other brands do not.

(page 167)
Imprinting a Brand
…Creating a new category and then imprinting your brand on that category is the essence of success.

…While the concept of establishing a leader brand is simple, the execution is difficult.

(page 170)
It's not necessary to actually be first, it's only necessary to create the perception that your brand was first.

("Saying it and creating the perception of being first are two different things, of course…)

(page 171)
When your brand is the first brand in a new category, it's widely perceived as the original and the pioneer. When other brands invade your territory, they are widely perceived as me-too copycats.

(page 172)
The real issue in marketing is not creating a brand. The real issue in marketing is creating a new category and then using your new brand name to dominate that category.

(page 173)
Pepsi-Cola, on the other hand, gave up on its me-too sports drink brand (All Sports) and spent $13 billion to buy the real thing (Gatorade along with its corporate parent, Quaker Oats).

PowerAde, KMS, Fruitopia, Mr. Pibb, Surge, and Mello Yellow represent six misguide attempts on the part of Coca-Cola Company to create new brands when they should have focused on creating new categories.

If the world's leading soft-drink company and owner of the most valuable single brand in the world (Coca-Cola) has consistently been unsuccessful in building new brands, why should you think your company can succeed using similar strategies?

You Don't Build Brand. You Create Categories
In truth, you don't build brands at all. You exploit divergence to create a new category, and the expansion of that new category allows your new brand to flourish.

(page 174)
(Someone once said that the way to establish yourself as a leader is to find a parade starting to form and then run in front of the crowd with a flag.)

(page 175)
If convergence were the driving force in business, over time we would expect to see fewer categories, fewer brands, less competition. Is this a realistic view of the future? We think not.

It's certainly not a realistic view of the past. For hundreds of years, the future has always brought more categories, more brands, more competition. What possible reason is there to believe that the future will be any different from the past?

Marketing is not a battle of brands; it's a battle of categories. Winners are those companies that can invent and dominate new categories. (Think Dell, Intel, Microsoft.) Losers are those companies that get blindsided by new categories created by their competitors. (Think Western Union, Polaroid, Wang.)

(page 176)
Convergence in the Airline Industry
In the thirties, passenger airlines decided they could make extra money by also carrying freight. Their planes were flying the routes anyway, so marginal costs were low and they could charge high prices for fast deliveries. So every major airline set up an air cargo division. It was like found money.

Not for long. The air cargo plum lasted only long enough for entrepreneurs to figure out a way of launching all-cargo airlines.

The first air cargo company to take off was Emery Air Freight, which was founded in 1946. By leasing extra space on scheduled airlines, Emery rapidly became the air cargo leader. Later, of course, Emery lost its leadership to the more narrowly focused Federal Express, the first "overnight package-delivery company.

Today the big three airlines (American, United, and Delta) carry relatively little cargo. Last year cargo revenues for the big three were $1.7 billion or just 3.6 percent of their total revenues of $46.7 billion. (FedEx alone carried $15.3 billion in air cargo last year.)

Maybe that $1.7 billion was just "frosting on the cake. If so, either the frosting or the cake is in serious trouble. Together the big three airlines lost $9 billion last year.

Well, you might be thinking, the entire airline industry is in trouble, in part because of 9/11 and a decline in passengers. True, but how come Southwest Airlines continues to make money?

(Southwest Airlines alone is worth more than three times as much on the stock market as American, United, and Delta combined. And FedEx alone is worth more than five times as much on the stock market as the big three airlines.)

(page 177)
Divergence in the Airline Industry
Why are Southwest and FedEx successful? In a word, divergence. Each picked off one of the services offered by the major airlines and built a company around that single service. Overnight cargo in the case of FedEx. Coach passengers in the case of Southwest.

(page 187)
There is no one way to build a brand. There are two ways. Either be first and establish your brand as the leader. Or be second and establish your brand as the opposite of the leader.

(page 190)
It's not to say that No. 2 brands like Burger King don't have a strategy. They do (1) Emulate the leader, and (2) do it better. The problem is, these strategies are self-defeating.

The Do-It-Better Trap
Many companies (and brands) have found a way to "do it better. What they haven't solved is the mental problem. How do you persuade consumers that your brand is better than the leader's brand?

…We can think of examples where No. 2 brands overtook a leader, but none where two conditions were met: (1) the leader was strongly entrenched in the mind, and (2) the No. 2 brand used a "we do it better strategy.

(page 191)
Doing It Different
Invariably when a leader is overthrown, it's because the No. 2 brand used a "do it different strategy.

Enterprise became the leading rental-car brand not by overtaking Hertz at airport terminals, but by setting up car-rental facilities in suburban locations and focusing on the "insurance replacement market. In other words, Enterprise did what a would-be No. 2 brand should do. Set up a mental distance between it and the leader. (In Enterprise's case, it was a physical distance, too.)

Today, Enterprise racks up $6.9 billion in annual revenues compared with $5 billion for Hertz. But guess what? Hertz is still widely perceived as the leader in rent-a-cars.

Perception is a long-lasting phenomenon. You can lose your sales leadership and still maintain your brand leadership in the mind as the Hertz example demonstrates. Perception is an immensely valuable attribute. We fully expect Hertz to regain its revenue leadership at some point in the future. Its task is simplified because it doesn't have to also regain its perceptual leadership.

(page 216)
A Multiplatform Media Brand
You might be surprised to learn that the largest-circulation newspaper in America is "no longer a newspaper, according to President-Publisher Tom Curley. It's a "multiplatform media brand. Harmless enough as long as readers and advertisers still think of USA Today as a national newspaper.

It usually doesn't hurt an old, established brand like USA Today to inflate its category, but it does hurt a new brand that tries to break into a mythical category called multiplatform media brand.

Take Talk Media, a division of Miramax, itself part of the Walt Disney Company. The driving force behind the new venture was Tina Brown, former editor of Vanity Fair and The New Yorker as well as British magazine Tatler.

Tina's goal was huge. She wanted to link the world of magazines and books with the film and TV industries. The first link in the multiplatform media chain was Talk magazine.

In spite of a torrent of favorable publicity, Talk magazine managed to lose $54 million in its first two years, so Miramax shit it down and Tina took her talents elsewhere.

Another disappointment is DreamWorks SKG. Founded nearly a decade ago by Director Steven Spielberg, animation executive Jeffrey Katzenberg, and music mogul David Geffen, DreamWorks hoped to become a powerhouse in music, television, and film.

The dream has faded. The movie business isn't doing particularly well. With the exception of Spin City, its TV shows have never really taken off. And recently DreamWorks sold its music division for about $100 million.

(page 217)
A Full-Service Media Company
A prime example of the dangers of blowing up your category is Primedia. In 1999, Tom Rogers was hired away from NBC by the buyout firm Kohlberg Kravis Roberts to expand Primedia from a hodgepodge of magazines and directories into a full-service media company that embraced the Internet.

At the time, Henry Kravis of Kohlberg Kravis said, "Today, what is really needed for us is to become a full-service media company; that means not just print, not just television, not just the Internet, but we need to take the assets that we have and really go into the new technologies.

Months after Mr. Rogers was hired, Primedia stock hit a high of $34 a share. Current price: $2.60. (Now $3.93, 020105)

(page 218)
Multimedia Everything
A vivid example of the failure of multimedia to amount to anything is Vivendi Universal and its former CEO Jean-Marie Messier. According to the New York Times, "He lived in a $17.5 million apartment on Park Avenue, flew around the world in a fleet of private jets and spoke of 'synergies' and 'convergence' with zeal.

In just six years, Messier managed to turn Vivendi (originally a French water utility) into a worldwide media conglomerate with the acquisition of MCA Records, Universal Studios, USA Networks, plus various publishers, theme parks, video-game producers, and Internet companies on both sides of the Atlantic.

According to Business Week, the game plan went like this: "For a while, many media execs dreamed that by snatching up Web startups, Net and wireless-distribution systems, and cable-TV companies, they could create a new world. It was to be a utopia in which every kind of media - from movies to games to music - could be delivered to anyone, anytime, and anywhere via every imaginable gizmo and gadget.

Today, Messier is gone, Vivendi, after losing some $70 billion in market value, is being watered down and sold. Financially forced pruning.

(page 219)
The Sad Situation at Sony
Take the Sony Corporation, for example. If you did a survey, you would probably find that Sony is the world's most admired electronics brand. Way ahead of whatever brand might be in second place.

Terrific for owners of Sony products. But how about owners of Sony stock? Does the company make any money? The sad fact is no. Net profits after taxes at the Sony Corporation are small. Very small.

In the last ten years, Sony Corporation had revenues of $519.2 billion. But net profits after taxes were only $4 billion. That's eight-tenths of one percent of sales. It's hard paying off your bank loans, not to mention paying dividends to investors, with that kind of return.

Of course, this is Japan, so who pays off their bank loans anyway? Not when the Bank of Japan has cut its benchmark short-term rate effectively to zero.

Like most Japanese companies, Sony is heavily line extended. Sony puts its brand name on television sets, videocassette recorders, digital cameras, personal computers, cellphones, semiconductors, camcorders, DVD players, MP3 players, stereos, broadcast video equipment, batteries, and a host of other products.

Yet Sony's most profitable product is the PlayStation videogame player, a brand that makes minimum use of the Sony name. (As powerful as the Sony brand might be, PlayStation is an even better brand name for a video-game player because it stands for something in the prospect's mind.)

(page 220)
Compare Sony to Dell
Sony makes personal computers and a lot of other products. Dell just makes personal computers (until recently when they added printers). In the last ten years, Dell had sales of $140.3 billion and net income after taxes of $8.5 billion, or a net profit margin after taxes of 6.1 percent versus 0.8 percent for Sony.

That's not fair, you might be thinking, to compare Dell with Sony. You picked a company (Dell) that is exceptionally profitable.

Actually that's not true. Dell is in a highly competitive business where profit margins are thin. As a result, Dell's 6.1 percent profit margin is not particularly spectacular, but is above average.

In the last ten years, net profit margins at the average Fortune 500 company were 4.7 percent of sales. (If you leave out the last two years since 9/11, the percentage jumps to 5.7 percent.)

Many American companies have done a lot better. Microsoft: 31.7 percent. Intel: 21.6 percent. Coca-Cola: 16.5 percent. Sony at 0.8 percent income after taxes is just not playing in the big leagues.

We have preached against the perils of line extension ever since the publication of Positioning book some two decades ago. And every time we do, someone always say, "What about the Japanese? They do the exact opposite of what you are recommending and they are extremely successful.

Are they?

The Japanese Track Record
In the last ten years, Hitachi had revenues of $708 billion and managed to lose $722 million. NEC had revenues of $397 billion and lost $1.3 billion. Fujitsu had revenues of $382 billion and lost $1.6 billion. Toshiba had revenues of $463 billion and a net profit margin of just 0.15 percent.

Large, unfocused companies make little after-tax profits. And if you don't make money, you can't pay off your bank loans. And if you can't pay off your bank loans, the banks are in trouble.

The top of the Japanese economic system is weak because their base is weak. Japanese companies, for the most part, make everything except money.

Why is it so difficult for large, unfocused Japanese companies to make money? It can't be product quality. Most Japanese companies have a worldwide reputation for high quality. A reputation that, for the most part, they deserve.

Our conclusion is that line extension inhibits branding. When a company makes and markets a broad range of products under one name, it is extremely difficult to build that name into a powerful brand.

Don't any Japanese companies make money? The companies whose brands are relatively focused do much better. Sharp (1.8 percent), Toyota (3.1 percent), Honda (3.3 percent), and Canon (3.8 percent).

We have followed the financial of Japanese companies for years. We find that the average large Japanese company has a net profit margin after taxes of about 1 percent compared with the average large American company at 5 percent.

(page 227)
Creating a Category
The most difficult job in marketing, and also the most rewarding, is creating a new category.

…The first, and the most important question of all, is what's the name of the new category. If you cannot define the new category in simple, easy-to-understand terms, the new category is unlikely to become successful.

(page 243)
New Brands Almost Always Beat Old Brands
If the category is important enough, the ultimate winner is always the new brand created exclusively for the category and not the old brand that has been stretched to fit the new category.

Personal computers turned out to be an important category. So the winner was not the old brands stretched to cover the category (IBM, Digital, Want, and a host of others), but the new brand created especially for the category (Dell).

(page 248)
Where Does Opportunity Lie?
Opportunity does not lie in brands, opportunity lies in categories.

Companies should think about creating categories, not brands. If you can dream up an exciting new category and then preempt that new category with a unique new name, you have a powerful combination.

(page 249)
Where Do Categories Exist?
On Main Street or in the mall? In the drugstore, in the department store, or in the supermarket?

None of these places. Categories exist in the mind. You create categories in exactly the same way you create brands. By positioning the name of the category in the mind of the prospect.

Be careful of research, however. If you want to find out what categories exist in the mind, you can't necessarily rely on research to tell you.

Consumers seldom use category names to describe their feelings. When you ask consumers what kind of car they prefer, they will seldom say, "A European luxury car. Rather, they will say, "Mercedes or BMW. They might think in terms of categories, but they express categories in terms of brands.

When you ask someone what kind of beer they prefer, few people will say, "A European luxury beer. Rather they will say, Heineken or Beck's. They might think categories, but they talk brands.

So naturally marketers follow the same pattern. They tend to forget about the category and jump right into promoting the brand. Big mistake. Unless you are first in a new category, you are unlikely to capture the attention of the prospect.

(page 257)
Establishing an Enemy
Establishing an enemy is almost as important as creating a new category. No category will be successful unless it has an enemy. No new brand will be successful unless it also has an enemy

The world is filled with inventions that never go anywhere because they don't have enemies. They are just interesting concepts that never find a place in the consumer's mind.

Solving a Problem is Not Enough
Most people don't think in terms of problems, they think in terms of categories. "I need a better job, a better house, a better car, a higher salary.

Ask the average person to name their most pressing problem and they will have to think long and hard before answering "Aaaaahhh…my spouse?

(page 272)
Advertising has little credibility. To be effective, advertising needs the credibility that only third parties can provide. Third parties being friends, neighbors, relatives, and especially the media.

(page 274)
Advertising lacks credibility, the crucial ingredient in brand building.

The news media wants to talk about what's new, what's first, and what's hot. The definitely don't want to talk about what's better. That makes them look like a shill for an individual brand.

Furthermore, what others say about your brand is much more powerful than what you say about it yourself.

(page 278)
The easiest thing to hide in America is a million dollars' worth of advertising.