In my last post, I wrote about why distinctive customer targeting is a smart strategy. But over time, this strategy has to evolve. Consider two iconic companies, the National Football League and Walmart.
In 1966, the National Football League merged with the American Football League and hosted the first Super Bowl. Fifty years later, the league attracts more male fans than just about any other professional sport in the United States. Walmart, meanwhile, spent the last five decades developing massive, full-line discount stores across the United States. Today, the company has few places left to build.
Both the NFL and Walmart are nearing the limits of their target market. They are outgrowing their target customer. To continue growing, both need new markets to conquer. But that’s easier said than done. For example, in August 2015, the NFL’s Tampa Bay franchise introduced a campaign to attract more women to its games, but many found its approach condescending and insulting. Likewise, in early 2016, Walmart announced that it was shuttering its small-store format, Walmart Express. Express was an attempt to grow in urban areas and towns too small for a Walmart superstore.
To continue growing, you need new markets to conquer. But that’s easier said than done.
An important lesson here is that when you’ve outgrown your target customer, you have to stretch every element of your strategy — namely, your target market, value proposition, and capabilities system — in a coherent way. Consider Gap Inc. It created Old Navy in 1994 when its namesake business was nearing the saturation point with the target market for its classic-style, moderately priced clothing basics. Old Navy, now the jewel in Gap’s crown (although it just suffered a weak holiday season), sells on-trend clothing at a lower price point with a materially lower-cost store design. Its value proposition was designed to attract a different target customer, while leveraging the same design and supply chain capabilities that distinguished the original business.
When you’ve outgrown your target customer, you have to stretch every element of your strategy.
Now contrast Gap’s Old Navy and Walmart’s Express strategies. The latter requires new capabilities — for example, inventory and supply chain management that involve smaller, more frequent direct-to-store delivery drops — and a financial model that is low-volume, high-margin (the opposite of large stores). And it has a value proposition (locational convenience) that the general population doesn’t associate with its brand. As I predicted back in January 2014, it was doomed to fail.
If the challenge for the NFL and Walmart has been outgrowing their target customers, the challenge for Lego and IBM was the opposite. With the explosion of video gaming in the 1990s, making things with Lego’s famous plastic bricks lost its cool factor with children at an increasingly earlier age, thus shrinking its target market. In 2004, Lego almost went bankrupt after a failed attempt to enter the video game business.
Similarly, in 1993, IBM faced bankruptcy and calls to dismantle itself after its entry into the PC business failed to offset waning demand for its mainframe computers. The invention and rapid commercialization of midsize computers (known as “servers” today) with desktop terminals made corporate IT departments think differently about their computing needs. In other words, for Lego and IBM, instead of outgrowing their target customer, their target customer was outgrowing them.
To return to growth, each had to revitalize its relevance and distinctiveness with its target customer. This, too, is challenging but possible. For example, MTV, the cable channel owned by Viacom, launched in 1981, bringing televised music videos into the homes of teenagers hungry for this medium. But then those teenagers grew into adults, and the teenagers that replaced them found new, preferred ways of consuming their music, through CDs, MP3 players, and eventually the streaming Internet. MTV was facing terminal decline until it pivoted its programming toward reality and scripted TV shows geared specifically to teens and newly minted adults.
Similarly, when Lego brought in new leadership in 2004, it entered areas — amusement parks, education, virtual model construction, and movies — specifically to increase the engagement of children (and parents) with Lego building blocks. Lego went from near-bankruptcy to becoming the world’s largest toy company, recently surpassing Mattel.
Like Lego and MTV, IBM’s renewed success was achieved by revitalizing its appeal with current customers. Instead of breaking itself up, IBM’s board brought in a new chief executive, Lou Gerstner, who promptly reinvented the company’s value proposition from providing a product (mainframe computers) to providing a solution (integrating hardware, software, and business processes). The company regained its status as an essential partner to the world’s largest and most important enterprises.
Successful strategies ensure that companies will eventually outgrow their target customers. Competition, innovation, and demographics ensure the opposite: that target customers will outgrow their strategies. Both scenarios create existential threats. The only way out is to stretch your strategies in ways that will open new markets to conquer when you’ve hit the limits of your original markets, or to breathe new life into your current markets when they are starting to slip from your grasp.