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Published: August 26, 2005

 
 

Format Invasions: Surviving Business’s Least Understood Competitive Upheavals

In 1980, Circuit City was a rapidly growing electronics retailer, with a better format than traditional TV dealers. Customers viewed floor samples, made their selection — usually with help from a commissioned salesperson — and paid for the merchandise. They then took their receipt to a separate pick-up window, near the store exit, to collect their purchases. Many other retailers copied this format, including a small but successful electronics chain named Sound of Music, based near Minneapolis.

Then, in 1981, a Sound of Music store in Roseville, Minn., was hit by a tornado, forcing managers to hold a clearance sale with the inventory stacked on the sales floor. It was an unexpectedly wild success. Through this random event, company founder Richard Schulze discovered that a discount, no-frills, self-serve value proposition could be both very attractive to customers and very profitable for the company. After a couple of years of experimentation, Mr. Schulze opened his first warehouse-style, truly self-serve superstore in 1983, changing the company’s name to Best Buy at the same time. The following year Mr. Schulze, sensing his new format’s cost advantage over the incumbent leader, Circuit City (still thriving at that time), committed his company to a “won’t be undersold” pricing policy. Mr. Schulze continued to adjust the new format during the next few years; in 1989, he launched a “grab and go” store, with salaried rather than commissioned salespeople.

Between 1994 and 2004, Best Buy gradually eclipsed Circuit City — earning a compound total shareholder return of 28 percent per year while Circuit City managed just 8 percent (despite a rapidly expanding market for consumer electronics). Circuit City lost market leadership in the sector beginning in 1997, but continues to follow its old format strategy. By now, it’s a troubled company.

Companies that successfully survive a format invasion seem to have four common attributes:

1. Successful incumbents start with a clear and accurate vision of how the new format works for their competitors — how it serves customers adequately at much lower cost. Undeniably, that’s hard work. A new format focuses on unfamiliar aspects of the business; an accurate vision must grasp what that new focus is. But the new format differs from the traditional format in so many ways — spread across so many parts of the business yet knitted so closely together — that it’s hard to see. The successful companies don’t just assemble a factual, detailed view of the new format; they fit those details into a realistic overall picture.

2. Successful incumbents undertake the new format as an integrated whole, recognizing its tightly interlinked nature. Too often, incumbents experiment halfheartedly with imitating a new format, layering bits and pieces of it onto their existing business. They modify just one element of their traditional business at a time, or they make a modification but don’t pursue its implications through the rest of the business. Few companies have an appetite for making a flying leap to a whole new operating model — which is another way of explaining why so few incumbents make the transition to a new format. But the alternative — piecemeal adoption — just won’t produce results.

3. Successful incumbents adapt the new format in ways that don’t compromise its cost advantages. They provide a basic-level offer that meets the intruders’ bottom-level prices profitably at the basic amenity level. This reclaims the bottom-of-market volume that they would otherwise forfeit to the new-format competitor. To this, they may add products or services with more features or amenities than the intruder has yet offered. They resist the temptation to blend the new format with the traditional format — an approach usually justified as “we’re doing it, but our way.” That approach rarely succeeds. After all, the new format moved away from the old to achieve some specific objectives; it’s hard to move back without compromising them. These blends often fritter away much of the new format’s cost advantage without any decisive offsetting gain in customer appeal.

 
 
 
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Resources

  1. Clayton M. Christensen, Scott D. Anthony, and Erik A. Roth, Seeing What’s Next: Using the Theories of Innovation to Predict Industry Change (Harvard Business School Press, 2004): A theory of disruptive success that partly, but not completely, meshes with the format invasion concept.
  2. Jeff Ferry, “Flextronics: Staying Real in a Virtual World,” s+b, Winter 2004: A Singaporean contract manufacturer emulates Toyota’s innovations. Click here.
  3. Victoria Griffith, “Welcome to Tesco, Your Glocal Superstore,” s+b, First Quarter 2002: Of the s+b retail case studies, the most relevant format-renewal example. Click here.
  4. Tom Hansson, Jürgen Ringbeck, and Markus Franke, “Flight for Survival: A New Business Model for the Airline Industry,” s+b, Summer 2003: More detailed view of the airline format invasion and its cost consequences. Click here.
  5. Art Kleiner, “The Next Wave of Format,” Deeper News, 2001: Manifesto about Internet and media formats as socially created, not technological, innovations. Click here.
  6. William Leach, Land of Desire: Merchants, Power, and the Rise of a New American Culture (Vintage, 1993): Early 20th-century format invasions among department stores, fashion merchandisers, and investment banks.
  7. Chuck Lucier, “Herb Kelleher: The Thought Leader Interview,” s+b, Summer 2004: The cofounder of Southwest Airlines explains the strategy underlying his airline’s cost advantage. Click here.
  8. Costas Markides and Paul Geroski, “Colonizers and Consolidators: The Two Cultures of Corporate Strategy,” s+b, Fall 2003: Cultural change for enabling resilience among incumbents. Click here.
  9. James Womack and Daniel T. Jones, Lean Solutions: How Producers and Customers Achieve Mutual Value and Create Wealth (Simon & Schuster, 2005): Wholesale Toyota-inspired manufacturing and service redesign.
 
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