Brand Fragmentation

Is business, consumer and brand fragmentation the new strategic paradigm?

An inevitable consequence of rationalisation and consolidation is commoditisation – and poor customer service, warns Dr Thomas Oosthuizen.

Size mattersBusiness has a recent history of industry rationalisation, consolidation and pursuit of size; achieving critical mass has been what it’s all about. This applied to financial services, the automotive sector, retailers, airlines, telecommunications companies and many more besides. There is hardly an industry where consolidation has not been applied, with the result that a few large companies came to dominate almost all industries.

Much of this thinking was based on the principle of ‘the experience curve’ – an idea developed in the mid-1960s that says a company's unit cost of manufacturing falls by about 25% for each doubling of the volume that it produces. In addition, investments in infrastructure and technology (which are considerable parts of the capital investment of a business) demand maximum optimisation of this investment.

The logic of the time was simple: to support the required infrastructure in systems and people, volume was required. Also, as industries commoditised, margins became squeezed and therefore volume was the only way to beat the odds.

While some aspects of this thinking have not gone away, the more recent context of how consumers are evolving will force a change. If not, a large company may just find itself having progressively fewer customers because, paradoxically, it is so ‘efficient’.

In the process, consumers came secondHowever much we may justify consolidation – and even call it inevitable – the reality is that the process results in the consumer coming second. Whether this is cause or effect is an issue for another discussion, but it does not really matter.

Because of the perceived need for consolidation at all costs, companies started focusing on efficiencies, benchmarking and ‘best practice’ as their holy grail, instead of looking at ways they could make the consumer experience the top priority. Some brands went so far down this path that it is arguable as to whether they can ever reverse it and become customer-centric again.

With consolidation, competition declined and ‘average’ became good enough. Some brands within telecommunications and the airlines sector were even so arrogant (or perhaps just honest) as to say it. Commoditisation increased and brand parity became the new normal.

In many industries, price became the deciding factor between brands. After all, if everything is the same, why would you want to pay more than you have to? In the American airline industry, this undermined the value of the entire sector as a worthy investment.

The negative impact of consolidation on the public’s perception of brands is also evident in how the ranking of global brands (according to the annual BrandZ survey by consultancy Millward Brown) has shifted away from the old stalwarts to luxury and newcomer technology brands.

Commoditisation become the new normalIn the process of consolidation, the consumer became a commodity. It was not about servicing them well, it was about servicing as many as similarly and as economically as possible. So if some customers defected to another brand that was fine, as long as the total volume of customers who remained was still large enough to provide the required critical mass.

Once again, airlines and telecommunications companies were among the best examples. High churn rates were easier to manage (…or ignore) than providing increased value to the consumer. The higher costs of better and more integrated systems, highly trained staff and achieving more exacting standards were simply not matched by the potential gain for the companies, they believed.

The end-result was commoditisation; offering consumers products and services that were more-or-less the same, instead of the incurring the complexities (and costs) involved in customisation. The lowest common denominator became the yardstick; systems that were ‘good enough’ instead of exceptional; staff that were good enough rather than excellent; facilities that were good enough rather than outstanding. Although many companies used the term ‘the best’, very few knew what it meant.

Mass marketing was the way brands dealt with this situation; creating ‘aggregate’ messages that appealed to aggregate people. It’s the same as the notion of soap operas on TV, where ‘average’ people watch average programmes in very large numbers. The philosophy was: seeing that most people need soap, ‘soapies’ are ideal for delivering the largest audience at the lowest possible advertising rates.

When this became too obvious, market segmentation started. In this scenario, groups of similar consumers were treated in the same way, so at least there was an attempt to differentiate at a certain level. But the approach still did not acknowledge the

differences between individuals, although it did between groups of people. Once implemented well – which happened rarely – customer experience improved. This still cannot, however, be compared to having a one-on-one experience driven by particular consumer needs and expectations.

Then some brands broke the rulesToday there are cracks appearing as a result of the commoditisation and market segmentation approaches. The very large global banks, for example, are experiencing difficulties, at least some which are connected to their diverse and very large global footprint. They forgot that brands often vary in their reach and market share; that local brands are still stronger in some markets than global brands.

Thus, it became obvious that the notion of global brands was often more theoretical than real.

More recently, small and disruptive brands have become beautiful to some consumers: Apple instead of Nokia, Tesla instead of Toyota Prius, ApplePay instead of Barclays, Amazon against Wal-Mart, Emirates against British Airways, Netflix against the big TV networks.

These brands have illustrated that being better can achieve an advantage when it comes to how consumers perceive and experience them. All of a sudden, being better also does not, of necessity, mean being more expensive – as brands such as Uber and Amazon are proving.

Not all of the above are equally big and equally successful. But all of them together are large enough to cause disruption. All of them are able to make consumers see there are other options available. All of them are at least able to make traditional industries ask questions about their own, long-standing, ways of doing things.

To leverage these trends, brand management needs to changeIn my follow-up article in the next issue I will discuss how the above impacts on marketing and brand management. Suffice to say, it is no longer business-as-usual. If the big brands ignore the negative effects of industry consolidation and rationalisation – and the creation of the consumer as a commodity – two things are likely to happen:

1. They will gradually erode their consumer franchise and create, at very best, consumers who are ‘sort-of’ happy.

2. They will empower competitors, old and new, to take advantage of these and other changes. While this will not in the short-term impact on large brands, it will allow others to become first movers in a changed marketplace. Given that first movers tend to become very dominant, the threat to the long-established stalwart brands is obvious.

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Dr Thomas Oosthuizen was formerly an honorary professor in business management at The University of Johannesburg and an independent marketing consultant. He is now Global Consulting Director at Acceleration Media, based in London.