Total DTC: Building a Better Approach to Reach Your Consumers (L.E.K. Executive Insights)

Whose customer is it, anyways?!

For too long, brands have wrestled with their channels over ownership of their consumers.

The advent of the Internet and e-commerce was supposed to change that, enabling brands to more easily sell “direct-to-consumer.” Many brands adopted such a “multichannel” or “omnichannel” approach, but with little web traffic, have found the results disappointing.

However, the rise of innovative digital-native brands, like Casper, Glossier, and Warby Parker, shows that DTC is much broader than “selling on your brand website.” In fact, brands should learn from these digital natives and adopt what we call a “Total DTC” approach.

A Total DTC approach has three elements:

  1. Customer acquisition
  2. Customer selling
  3. Ongoing customer engagement

These stages can be activated through a range of DTC tactics that go well beyond the brand website, such as social media, pop-up stores, the Amazon 3P Marketplace, subscription services, and more.

By engaging the consumer holistically, brands can finally take back control of the relationship. Leaders like Nike and Disney have already built integrated DTC organizations that surround the customer and serve as their own channels.

Brands that fail to do this, however, will cede that consumer ownership to retailers, who are heavily investing in digital engagement and customer experience, as well as to the digital disruptors.

My colleagues Rob Haslehurst, Noor Abdel-Samed, Jon Weber, and I explored this further in an Executive Insights article, which can be found here (online PDF): Total DTC.

After all, it’s your customer!

Mapping the Road to Autonomous Vehicles (L.E.K. Executive Insights)

There’s no doubt that, over the long term, autonomous vehicles (better known as self-driving cars), combined with electrification and shared mobility, have the potential to massively change society.

However, almost every other question is up for debate. How long until we reach “true autonomy” (level 4 and 5)? Will autonomy act as lighter fluid for shared mobility services? What will the downstream impact be, from traffic to travel to retail?

My colleagues and I like to say that these long-term effects depend on how we get “from 1 to 100” — that is, from the launch of self-driving cars to the day when autonomous mobility is ubiquitous. But while prognostication is fun, the map to that destination is
still far from clear.

The pieces of the first leg of the journey, however, are becoming slightly clearer. We call this going “from 0 to 1” — from where we are today, to the successful commercialization of the first fully self-driving vehicle. Going from 0 to 1 requires solving three key challenges:

  1. Technological: Achieving full autonomy (i.e., Level 4 or 5 on
    the SAE International automation scale)
  2. Regulatory: Creating the conditions for safe and effective operation
  3. Industrial: Discovering and organizing the right business model to produce a commercially viable product

The first two challenges are extraordinary, but will someday be overcome. More interestingly, the path forward on #3 — creating a business model to produce a sellable product — is just becoming clear.

In short, I believe there are two possible business models, which have deep parallels in the tech industry:

Many companies are placing their bets on what I call the “Apple model” — imagining an integration of hardware (the vehicle, sensors, etc.) and software (the AI “brain” making decisions to operate the car). In fact, most of the automakers — fearful of being reduced to commodity hardware players — are betting heavily on this model.

However, a division of labor may be more likely. I call this the “Android model” — where the key decision-making challenges are solved by an AI and machine learning platform — such as the one Alphabet (Google)’s Waymo unit is working on — and then licensed across numerous hardware-makers. There is increasingly evidence to suggest that industry leaders like Waymo, Apple, and Baidu are pursuing this approach.

My colleagues Alan Lewis, Rob Haslehurst, and I explored this further in an Executive Insights article, which can be found here (online PDF): Mapping the Road to Autonomous Vehicles.

How Brands Can Win Big by Thinking Small (L.E.K. Executive Insights)

For consumer brands, growth isn’t easy to come by these days. Preferences are shifting, core channels are flagging, and the competition is innovating.

In response, brand leaders are told to “think big.” What will really move the needle? The growth levers for brands are as obvious as they are tempting:

  • Target more consumer segments
  • Distribute in more channels
  • Expand to more geographies
  • Etc.

Less obvious is that, for many brands, pulling these levers can lead to slow-motion brand destruction. Look at Quiksilver, which built on its powerful surfing heritage to expand into new sports, built additional products and brands to win new consumers, and expanded into mass channels – and declared bankruptcy in 2015.

Contrast them with Tory Burch, who has built a billion-dollar brand by keeping it true to her lifestyle and never diluting it for growth’s sake. Tory instinctively understands that discipline, not aggressive expansion, is the key to winning customers.

Why? Counterintuitively, the secret to growing big is often for brands to think small. “Thinking small” means focusing – on your brand promise, on your target consumer, on the little things that make your product magical. Companies that think small control their distribution and retail experience and grow big anyways (think Apple). They know who they are and what they stand for. And they make growth the outcome of building a great brand, not the purpose.

 

My L.E.K. colleagues Jon Weber, Jennifer Zablotny, and I explored this further in an Executive Insights article on lek.com, which explores five more brands like Tory Burch, as well as the four rules they follow to grow big by thinking small.

Here’s the full article (online PDF): How Brands Can Win Big by Thinking Small.

Is Apple Spreading Its Brand Too Thin? (L.E.K. Executive Insights)

Brands convey meanings to target customers, and Apple’s brand is the world’s most valuable. That’s why two of its recent moves are so fascinating. With the soon-to-be-launched Apple Watch Edition collection, Apple has created its first true luxury fashion product. At the same time, its IBM Mobile First for iOS partnership represents its first real push into enterprise IT from the CIO down.

From a strategic perspective, this is remarkable. But from a marketing perspective, it is unprecedented. The luxury fashion consumer and the CIO could not be more different audiences, and require very different messages to persuade them to spend comparatively enormous amounts. Other companies faced with this dilemma use entirely different brands to do so. Apple is attempting to use the same brand with both.

Does the Apple brand have the strength and malleability to convey the right associations to each audience? Or has Apple, in this instance, lost Steve Jobs’ legendary ability to focus? Is Apple spreading its brand too thin?

My L.E.K. colleagues Rob Haslehurst, Brett Baptist, and I explored this further in an Executive Insights article on lek.com. Here’s the full article (online PDF): Is Apple Spreading Its Brand Too Thin?

Design Is About Intent

The most admired companies of each age are often associated with a certain core competency. Ford popularized assembly line manufacturing in the 1910s. Toyota kicked off the lean revolution with its Toyota Production System in the postwar years. GE’s enthusiastic adoption of Six Sigma in the ’90s spread the mantra of quality. These capabilities are credited with helping transform the respective industry of each company.

Apple is unquestionably the most admired company in the world today. So what is Apple’s defining capability?

Lest there be any doubt, they told us last summer: Apple is about design. It’s what they value, teach, and celebrate, and it’s what has enabled them to revolutionize industry after industry with innovative products and business models. 

 

Design as the New Management Tool

Largely due to Apple’s unprecedented success, design has recently become extremely fashionable in the broader business imagination:

A selection of recent headlinesDesign

Business gurus like Roger Martin, institutes like Stanford’s d.school, and consultancies like IDEO have all helped spread the gospel. With the worthy aim of making design accessible to the rest of us, they’ve broken down “design thinking” into step-by-step frameworks, which generally involve empathetic understanding, creative ideation, and experimental prototyping.

We saw this pattern with the Lean and Quality movements too – both generated extensive, organized, and widely adopted disciplines (think of Six Sigma’s DMAIC methodology and hierarchy of belt colors). But I fear that “design” has moved too quickly to the tools and techniques stage – the “how,” instead of the “what.” It’s quite evident that even Apple’s close competitors have not come anywhere close to replicating its design capabilities. And the reason is that many companies are missing the forest for the trees.

 

What Design Is Really About

Putting aside all the trappings associated with them, the big management ideas described above can be whittled down to first principles. The core object of the Lean philosophy is waste. Quality is fundamentally about variability. And design is about intent.

Intent means purpose; something highly designed was crafted with intention in every creative decision. Frank Lloyd Wright explained that intent drives design with the credo “form follows function“; P&G calls this being “purpose-built.” The designer is the person who answers the question “How should it be?”

Overarching intent is easy. The hard part is driving that conscious decision-making throughout every little choice in the creative process. Good designers have a clear sense of the overall purpose of their creation; great designers can say, “This is why we made that decision” about a thousand details.

Which is exactly what Apple does. Their obsession with intentional choice is palpable and personal. When Jony Ive, Apple’s newly titled SVP of Design, criticizes a material selection or feature decision, “he’s known to use ‘arbitrary’ as a term of abuse.” Steve Jobs himself couldn’t even make the most mundane personal design decisions without deep consideration of intent; according to his biographer, this led to a longtime lack of ample furniture in his home:

“We spoke about furniture in theory for eight years,” recalled [wife Laurene] Powell. “We spent a lot of time asking ourselves, ‘What is the purpose of a sofa?'”

 

The Three Design Evasions

The opposite of design, then, is the failure to develop and employ intent in making creative decisions. This doesn’t sound hard, but, astonishingly, no other leading tech company makes intentional design choices like Apple. Instead, they all commit at least one of what I term the Three Design Evasions:

The first evasion: Preserving

The easiest way to avoid a decision is to not ask the question in the first place. Anyone who’s ever led a business project knows the temptation of recycling precedent – why reinvent the wheel? That’s why, for all of Microsoft’s recent design plaudits, the Surface still features a 30-year-old vestigial key. That’s also why BlackBerry’s last-ditch effort at mobile relevance, the Q10, has a physical keyboard yet again.

But great designers know that sacred cows must always be evaluated for slaughter. Apple is famed for aggressively making clean breaks with the past; you can decry any one decision, but to Apple, nothing is ever settled for good. As Christa Mrgan astutely observed in Macworld, “Sentimentality doesn’t make for good design.”

The second evasion: Copying

Copying others’ design choices is the most obvious way to abdicate forming your own intent and having to make decisions yourself. That didn’t stop Google from fundamentally redesigning Android after the iPhone was unveiled. Nor did it stop HTC from replicating the iPhone’s UI features or colors. Most shameless of all, of course, is Samsung, whose list of appropriated products, features, and even strategies is so long that one suspects the tendency is deeply entrenched in the company’s culture.

Without a doubt, Apple has copied certain features from its rivals as well. The difference is that Apple seems biased to design based on its own intent first, and copy second; its rivals tend to copy first.

The third evasion: Delegating

Delegating is by far the most subtle, pernicious, and widespread of the three evasions, particularly among tech companies. Under the guise of being “user-driven” or providing “choice,” delegators leave crucial design decisions up to the user. One can even subdivide this tactic into three distinct flavors:

A) Offering a wide range of product choice

Many of the most successful hardware companies seem incapable of deciding how their products should be, so instead they offer variety:

The banner of “choice” is always good PR, and may even be good product strategy for many companies. But it’s not design. Design means curating the choice for the consumer. John Gruber summarizes Apple’s starkly limited product line well:

“Apple offers far fewer configurations. Thus, [Apple products] are, to most minds, subjectively better-designed – but objectively, they’re more designed. Apple makes more of the choices than do PC makers.” 

As an analogy, giving someone birthday money instead of taking the time to choose a gift seems eminently logical – why limit the recipient’s choices? But the gifts we remember most fondly are seldom checks.

B) Trying to offer an omni-functional product

Good designers create things with specific uses in mind, which implies making purposeful trade-offs. Another way to abdicate design is refusing to accept those trade-offs; it feels better to make something that could be anything for anyone. Seth Godin calls this a design copout – creating something that “helps the user do whatever the user wants to do,” instead of expressing the creator’s intent.

Once more, Samsung is a prime example; David Pogue summed up his review of the Galaxy S5 thus:

“… if you had to characterize the direction Samsung has chosen for its new flagship phone – well, you couldn’t. There isn’t one … Overall, the sense you get of the S5 is that it was a dish prepared by a thousand cooks. It’s so crammed with features and options and palettes that it nearly sinks under its own weight.” 

This unwillingness to choose, to say no – to exert intent – is also exactly what plagued Microsoft’s Surface, its “no compromises” hybrid tablet/laptop. Unsurprisingly, this jack-of-all-trades device is still a master of none.

Does this mean good design is assertive, ultimately subjective, even restrictive? Absolutely. As Marco Arment put it,

“Apple’s products are opinionated. They say, ‘We know what’s best for you. Here it is. Oh, that thing you want to do? We won’t let you do that because it would suck.'” 

C) Deciding based on user testing

The final flavor of Delegating is a favorite of Internet software and services companies: using A/B testing (or some variant) to see which designs elicit the best metrics from users. Witness the descriptions of how design decisions get made at leading firms:

  • Google: “We think of design as a science. It doesn’t matter who is the favorite or how much you like this aesthetic versus that aesthetic. It all comes down to data. Run a 1% test [on 1% of the audience] and whichever design does best against the user-happiness metrics over a two-week period is the one we launch.”
  • Amazon: “We’ve always operated in a way where we let the data drive what to put in front of customers … We don’t have tastemakers deciding what our customers should read, listen to, and watch.”
  • Facebook: “It doesn’t matter what any individual person thinks about something new. Everything must be tested. It’s feature echolocation: we throw out an idea, and when the data comes back we look at the numbers. Whatever goes up, that’s what we do. We are slaves to the numbers. We don’t operate around innovation. We only optimize. We do what goes up.”

This kind of user testing – often dressed up as “failing fast” or “experimenting” – can be useful, but it’s not design. You can safely bet that Apple has never tested 41 shades of blue on users to decide the right color for its website links.

Look again at the list of companies cited above – Microsoft, BlackBerry, Google, HTC, Samsung, Lenovo, HP, Dell, Facebook, and Amazon. All ten were or are leading, innovative tech companies; all ten could be considered rivals to Apple in some sense; all ten evade the one capability Apple embraces most.

 

Designing Apple’s Future

What’s noteworthy is that while its competitors avoid design, Apple has been doubling down on it. The clearest example of this last year was iOS 7, Apple’s complete redesign of its most central product. iOS 7’s changes were deeply polarizing, but far from capricious; they were clearly underlain with deep intent.

Gruber correctly characterized iOSes 1-6 as prioritizing obviousness, with buttons and app icons so skeuomorphic, shadowed, and shiny that they looked lickable. iOS 7 did away with much of this ornamentation and use of affordances, and for a clear reason. As Ive explained:

“When we sat down last November (to work on iOS 7), we understood that people had already become comfortable with touching glass, they didn’t need physical buttons, they understood the benefits … So there was an incredible liberty in not having to reference the physical world so literally.”

In other words, as Apple’s intent changed, the design had to also. The new priorities seem to be clarity and order (compensating for the iPhone’s growing capabilities), hardware integration, and what I call “functional delight” – the feeling of joyfully intuitive, effortless actions with immediate, satisfying feedback. You can criticize any of the design decisions they made (and many have), but to do so without considering Apple’s intent is foolish.

This brings us to the present. Many analysts and pundits are puzzling over why Apple is reported to be buying Beats; I suspect Dave Troy and Ben Thompson are on to something:

Troy: The strategy that Apple is undertaking is to reposition the company away from being valued as simply a very good tech company that also happens to have aspirational brand appeal and instead as the world’s most valuable fashion and lifestyle company that provides fashionable, attractive technology through its ecosystem of compatible products.

Thompson: [A]re we witnessing a reinvention, into the sort of company that seeks to transcend computing, demoting technology to an essential ingredient of an aspirational brand that identifies its users as the truly with it? Is Apple becoming a fashion house? 

No outsider knows with certainty why Apple is buying Beats. But consider the following: if design is Apple’s core competency, then that skill should extend beyond computing. And if design can set it apart from all its rivals, then the goal must be to convince the world’s consumers to trust that Apple makes the right design choices for them. “Apple” must mean “great design.” And fashion brands are what we call the signifiers of great design taste.

*          *          *

We tend to think of Ford’s introduction of the assembly line as ushering in an industrywide transition. In reality, the majority of its contemporary competitors struggled to adopt the new system, and were terribly disadvantaged as a result: between 1920 and 1940, over 90% of several hundred U.S. automakers went bankrupt or otherwise vanished.

I don’t expect such a dramatic outcome for Apple’s rivals. But design has lifted Apple to great heights, and I suspect it can take them further. The rest of the world has certainly noticed. But they would do well to think a little harder about what adopting design really means.

 

Advertising Anachronism

Every morning I see this billboard ad in Boston’s South Station:Surface2

The ad is for the struggling Surface 2 tablet. Unable to build momentum since the launch of the original Surface in late 2012, Microsoft has doubled down on marketing its combined laptop/tablet product, and these ads have run for months.

Visually the images are eye-catching, reflecting the company’s new colorful aesthetic. And it does a nice job conveying the core marketing messages: this product combines a laptop and tablet; it’s for both work and play; it’s new yet familiar, etc.

But it was the middle image in particular that stuck out to me. It’s obviously intended to highlight the Type Cover keyboard, and the closeup frames the key with the new Windows logo. But it’s slightly off-center, so that the eye also focuses on the Alt key.

And that’s what stopped me. Why Alt?

Alt has been standard on PC keyboards since at least 1981, and has been lodged next to the Windows key since 1994. Its original purpose was as a modifier, multiplying the possible keystrokes one could input, before the advent of the graphical user interface obsoleted that need. Today, most Windows PC users only use it for a few idiosyncratic functions, like Alt-Tab to switch between windows and the infamous Control-Alt-Delete for logging in and calling up the task manager.

In other words, the Alt key is the quintessential vestige, like the human tailbone – an anachronism. No one designing a new keyboard or operating system de novo today would include it. True to form, Apple – famed for ruthlessly eliminating features that begin to outlive their usefulness – didn’t include Alt on the iOS keyboard for iPhone and iPad. So why has Microsoft kept it?

This gets to the heart of why Microsoft is being disrupted. Every business and product line accumulates barnacles, but for a long time, Microsoft had far more to lose from defeaturing the products at the center of its near-perfect business model than it stood to gain from tearing things down and starting over. When that’s been true for long enough, an organization becomes incapable of severing its vestigial organs and designing from scratch. And when that stops being true, the persisting inability can be fatal.

So even if the ad’s focus on the Alt key is unintentional, the message it symbolizes is quite deliberate. The entire Surface and Windows 8 strategy was a half-step into the future of tablets and touch, and its ads reassure its past customers “Don’t worry. This is familiar. We haven’t made a clean break with the past.

But the product is compromised and the strategy has failed. Microsoft’s strength has become its weakness. As mobile rises and the personal computer falls, all Microsoft can do is stand athwart progress yelling Stop.

In a world where Apple ritually kills its darlings, where Google launches moonshots no one sees coming, and where Samsung employees still live by their chairman’s order to “change everything but your wife and kids,” Microsoft advertises a brightly colored, defunct key more than 30 years old. Like Gatsby, Microsoft tragically fights for a future that continues to recede into the past. All it’s advertising is its own failure to adapt.

One Strategy, One P&L

How should a business be measured?

For a long time, the answer has been “more.” Ever since Frederick W. Taylor did time studies of steelworkers with a stopwatch in 1900, the measurement of business activity – called “Greater Taylorism” by Walter Keichel in his business history “The Lords of Strategy” – has grown ever more central to management. One result of this drive to quantify and analyze has been that senior executives often create numerous profit centers, or isolated groupings of both revenues and expenses nested within large businesses.

The two benefits are obvious. First, profit centers allow these executives to make better decisions. In organizations whose various revenue and cost accounts are not linked, poor economic performance can be hidden by positive results elsewhere, and decision-making is clouded. Second, profit centers help make accountability clear. By giving managers direct profit and loss responsibility, companies can incentivize activity that measurably contributes to the bottom line.

So in most large companies, different business divisions and geographic regions are organized as distinct profit centers. Increasingly, product lines, key customer accounts, or brands are treated as mini-businesses as well, like at Procter & Gamble, where global brand managers have P&L responsibility. For that matter, why not functions too? Some organizations are establishing transfer prices for supplies and services between business departments (such as manufacturing and sales), and then measuring, and rewarding based on, the income of each.

There’s just one problem. We optimize what we measure. And the entire logic of profit centers rests on the assumption that maximizing the pieces will maximize the whole.

Unfortunately, this shortcut often isn’t true. Exceptional, sustainable results derive from great strategy, and great strategy isn’t additive – it relies on the way individual pieces fit together in a system, so that the whole is greater than the sum of the parts.

Decision scientists know this – in their models, it’s the difference between finding the local optima (the best result within each “neighborhood”) and the “global optimum” of the whole system. For that matter, football coaches know it too; no professional coach would argue that the best way to win a championship is to focus on maximizing each individual player’s performance statistics.

Yet this is exactly how many businesses are run. Rather than sacrificing certain parts for the good of the whole, companies essentially force each division to stand on its own. This approach undermines strategic fit, which, as Michael Porter put it, “requires the integration of decisions and actions across many independent subunits.”

For a coherent strategy to work, then, the organization executing it must be measured as a whole, rather than as parts. In other words, if a company is to have a single strategy, it must be driven by a single P&L.

This may sound like an extreme position. Yet some of the world’s most successful companies operate this way. Apple famously has only one P&L, for which its CFO, Peter Oppenheimer, has direct responsibility. And while each of its major hardware product lines is priced to make a significant profit, it bundles in all its key software upgrades, products, services, and platforms for free. CEO Tim Cook explains the logic:

“We manage the company at the top and just have one P&L, and don’t worry about the iCloud team making money and the Siri team making money. We want to have a great customer experience, and we think measuring all these things at that level would never achieve such a thing.”

It’s Apple’s single-company mindset that lets it give away industry-leading software and cannibalize its own products, which in turn has led to its unprecedented success. But that’s not to say a single P&L is always the right answer. Instead, a company should have as many P&Ls as it does distinct strategies. P&G’s Gillette shaving brand has a very different strategy from its Bounty paper towel brand, and Gillette has a different strategy in India than in North America. But although Gillette sells its razors and blade cartridges separately, these products fall under a single strategy. P&G’s profit centers reflect these boundaries.

Of course, companies should still measure a division, product, or function’s profitability (to the extent it can be done accurately) – that’s just good management. But this shouldn’t be the primary basis upon which managers are held accountable for their decisions, or they won’t enact a strategy that looks beyond their narrow interests. Amazon wouldn’t be able to underprice and over-market the Kindle to achieve their larger strategic objective of selling content if the Kindle product manager’s main objective was to maximize hardware profits. Nor would “free” look like such a great price point for Google’s Android unit.

So measure carefully – because if you reward each area of your business for acting in its own best interest, you just might get what you wish for.