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Chapter 1 — It's the Brand, Stupid

James Carville, Bill Clinton's brilliant political strategist in the watershed election of 1992, famously kept the campaign on track by scratching three little words on a dry—erase board near his desk: "The economy, stupid."

I've often thought CEOs should be forced to do exactly the same thing: take down the office Monet and, instead, put a thumbtack into a scrap of paper that says, "The brand, stupid."

The recent history of American business is littered with the corpses of executives who forgot that. And a huge number of these executives, by the way, were running companies with very big brands. The problem is that there's a tremendous arrogance that comes from having a big brand, and that arrogance makes it easy to forget that even the biggest brand only stays big at the pleasure of the consumers.

BRAND ARROGANCE WAS ONCE COMMONPLACE

The most incredible example of brand arrogance I ever witnessed personally was at Citibank, where I worked for seven or eight surreal months during the late 1970s. Of course, today Citigroup is one of the biggest and best financial services companies in the world. And back then, it was one of the world's finest banks, except for the division I worked in, which was a lunatic asylum.

Somebody came up with the bright idea that because this was Citibank, all the nation's smaller banks and credit unions were eager to emulate the company in any way possible. And the particular set of geniuses employed by this division sat around thinking about what they could sell to the smaller banks: computer systems, tapes on how to train tellers, prepackaged loan programs—you name it.

No product was too small or trivial. Our bosses would come in and say, "We're doing these Christmas calendars for Citibank, and you know, we can sell these calendars," as if Wachovia Bank were going to buy a Christmas calendar produced by the competition. It was seldom about the quality of the products or services we were offering; it was just about how much of the company's operating costs we could offset by pushing these things off onto smaller players. And the attitude of everybody involved was, "They will buy because it's us."

One meeting in particular opened my eyes to the future of this endeavor. We sat in a conference room while various technical people made presentations about the products that we were going to sell. That morning, one of the company's senior people graced us with his presence. Let's call him "The Executive." Of course, he would never leap down two or three rungs on the ladder to address the person presenting personally. As far as The Executive was concerned, assistant vice presidents like me were nonexistent. He would speak only to our boss.

That day, one of my unfortunate peers happened to be making a presentation about the sales of computer systems to correspondent banks, and he started to say things such as, "There are some limitations to getting this done," "The product has a limitation," and "There's a time—frame lag."

After a few minutes, The Executive bestirred himself to say to our boss, "Put the cup up."

I had no idea what The Executive was talking about. Our boss whispered something to somebody, who produced a Styrofoam coffee cup and set it on the table in front of the poor guy doing the presentation. Then our boss explained to the guy that every time he said something The Executive didn't like, he had to put a nickel in the cup.

What The Executive didn't like soon became abundantly clear. He refused to hear anything that in any way, shape, manner, or form took him off his timetable and delayed the launching of the product. And every time he did hear something that suggested the product was not yet ready for market, he'd hold up one finger and indicate that it was time for the peon irritating him to toss a nickel in the cup.

My colleague had a couple of nickels on him, but that was it. Watching him root around in his pockets looking for change was just painful. So finally, our boss put a $5 bill in the debit cup for him so he could finish his presentation.

I was thunderstruck by the whole scene. Despite the childishness of what was unfolding, the project that my colleague was trying to tell the truth about was a rather significant one that was costing millions and millions of dollars. And it was not just that The Executive—this arrogant shell of a professional manager—was humiliating someone who seemed to me far more honest and competent than he was. It was also what he said at the end of the meeting: "We're Citibank. This is a marketing problem, not a product problem."

In other words, because we were Citibank, and so obviously bigger and better than every other player, the quality of what we were selling didn't matter. We just needed to market it.

Though he was considered rather brilliant otherwise, The Executive misunderstood completely what it meant to have a strong brand. The presenter, on the other hand, had it right. We had to work harder and be better than anyone else simply because we were Citibank and had a reputation to uphold. Add in the fact that the smaller banks, the intended market for these products, were already suspicious that Citibank wanted to take them over, and there was simply no way we could sell those banks anything if our products were not so superior that they felt they couldn't live without them.

My colleague, of course, quit soon after, unwilling to work for an organization that would allow him to be publicly embarrassed just for doing his job. The meeting convinced me, too, that the division was going to fail, and I'd better exit. Sure enough, it cost Citibank hundreds of millions of dollars to watch this little notion implode. Thankfully, John Reed soon took over, and Citicorp became an enviable powerhouse. And The Executive was jettisoned to a premature retirement.

I tell this story because many of the biggest brands in America were once run by people like that. Complacency used to be rampant in the business world. Part of the explanation was probably generational.

Of course, there probably isn't a Baby Boomer or Gen—Xer in America who hasn't felt a little soft in comparison to the World War II generation he or she is now taking over for. After all, those people survived the Great Depression, kept the world safe for democracy, and went on to prosper in almost everything they did. Tom Brokaw's recent bestseller, The Greatest Generation, makes the case for them about as directly as it can be made: "This is the greatest generation any society has ever produced," he writes. He's largely right, of course. The self—confidence of the World War II generation was earned—it came out of bitter experience.

One small problem, however: This older generation of executives retired believing that they had not just seen the rough—and—tumble of war, but also had seen the rough—and—tumble of business. And on that small point, I beg to differ. By today's standards, these heroes of the three—martini lunch were playing a country club game.

Twenty or 30 years ago, if you had a good solid brand, it tended to stay good and solid for a long time. Big players ruled: CBS, NBC, and ABC controlled television; Sears dominated retailing to the middle class. AT&T owned telecom, and the U.S. Post Office owned the mail delivery business. The life insurance business might have been a little more fragmented, but we were all reasonably happy. We knew who the competition was, we were making plenty of money, and no one threatened our business model.

In fact, the big life insurance players all did business the same way: We pushed our products through agents who went door to door and earned big upfront commissions on every policy they sold. For consumers, it was the most expensive, time—consuming, and intrusive of all possible ways of delivering life insurance, but that didn't matter: The Prus, the Mets, and the John Hancocks were the only places they could buy this stuff.

Then, when the Fidelitys and the Schwabs started appearing and siphoning off dollars into their mutual funds that would once have gone to life insurance, and when new players started selling life insurance through new distribution channels at a lower cost than we could, the guys at the top of the industry sat around saying, "Who's going to buy mutual funds when they could buy life insurance?" And later, they said, "Who's going to buy life insurance from these newly branded companies when they could buy it from us?"

Clearly, the life insurance industry at least was waiting for a fall, but for decades it didn't happen. It used to be very difficult for upstarts in many industries to catch any traction, mainly because there was only one way to establish a new brand: Advertise on network television. This actively discouraged new players from entering the arena. Network TV was prohibitively expensive. Plus, it was insanely wasteful: The demographic group you were targeting might represent only 10 or 20 percent of the network audience. The rest of the impressions you paid so much for would be throwaways. And network TV actually deterred innovation: Because you were paying for a mass audience, you'd be forced to make your products more generic to appeal to as wide a group as possible.

It cost such a huge amount of money to launch a brand that the marketplace was dominated by major corporations. They were like sumo wrestlers pushing each other around on mats. Their only competition was each other. And naturally, the conventional wisdom about branding reflected this inertia. The idea was that brands had to be built over a long period of time, and the more established you were in people's minds, the better. One theory called "double jeopardy" suggested that brands with large market share not only were bought by more consumers, but also were bought more often by more loyal consumers. In other words, all the advantages were thought to go to the incumbents. Some people even thought market share was static. The number—one brand simply stayed the number—one brand, no matter what.

So why wouldn't you be arrogant if you were IBM or Sears or the U.S. Post Office? And why wouldn't you dismiss any other way of doing business except the one that kept you on top? After all, who's going to want a personal computer? Why would anyone need to buy any other brand of appliance but Kenmore? And what's the big deal with overnight delivery, anyway?

It's amusing to consider the idea that all the advantages go to the established brands in light of today's marketplace. Brands that once seemed invincible—JCPenney, Sears, AT&T, the U.S. Post Office, and the "Big Three" television networks—are now just shadows of their former selves. Newer names have taken their place in the consciousness of the American consumer: The Gap, Home Depot, Sprint, FedEx, CNBC, and the WB Network. The landscape of business now looks like a series of earthquakes, as the Mount Everests crumble and upstarts who truly understand consumers rise out of nowhere to take their place. Every week, another big American brand wakes up out of a deep Rip Van Winkle sleep and finds that upstarts are shaking the ground out from under it. And the pace of change is only accelerating: Companies like eBay and Amazon.com that did not even exist a few years ago are now dominant brands in their fields.

We're not watching sumo wrestling anymore. Instead, the marketplace looks more like the bazaar scene in Raiders of the Lost Ark, where there's a big, menacing guy dressed in black, swinging a saber. He thinks he's tough until Harrison Ford pulls out a gun and shoots him. It's no longer the biggest guy who wins, but the fastest, smartest guy with the best command of new technologies.

THE CONSUMER REVOLUTION

Three very important events toppled the "sumo" brands. First, consumers' attitudes changed. The Baby Boomers were better educated than their parents and constitutionally less accepting of the status quo. Everything from Vietnam to Watergate to the Exxon Valdez disaster taught them that big institutions were not to be trusted. And suspicion of big corporations has proved to have real endurance as a pop—culture concept. In just the last few years, the movie A Civil Action had John Travolta battling Beatrice and W. R. Grace; The Insider had Russell Crowe and Al Pacino fighting Brown & Williamson; and Erin Brockovich had Julia Roberts shooting down PG&E.

Guess who came out looking better: Julia Roberts, overflowing her miniskirt and bustier, or the big utility brand, leaking poison from its wastewater ponds? It is a small step in this world from rich corporation to villain, and any big brand that doesn't keep that constantly in mind is foolish.

The second thing that's happened is that thanks to technology and the explosion of media outlets, it now costs a fraction of what it once did to enter a business and create a brand. The "high—tech company born in a garage" myth has been around for some time now, but the Internet has lifted the ability of intelligent people to launch a business on a shoestring to another level entirely. Jeff Bezos got Amazon.com off the ground with $300,000 of his parents' retirement savings. Pierre Omidyar launched eBay with no more resources than his own ability to write code and a $30—a—month Internet service. Yahoo! was launched in a trailer by two procrastinating Ph.D. candidates who were more interested in creating an Internet index than in doing the work they were supposed to be doing.

Whatever struggles upstart companies eventually face down the road, technology has made it easier than ever for them to at least get onto the field.

And whether you're in a new—world business or old, it's no longer only those corporations that can afford to advertise on the network evening news that speak to consumers. Two—thirds of American households now have cable television, which means that today there are 40, 50, or 60 channels you can use to reach them. There were also almost 18,000 consumer magazines in 1999, according to The National Directory of Magazines—a 40—percent increase over the number just 10 years earlier.

With its several billion pages, the Web offers a nearly infinite variety of ways to reach consumers. And e—mail has turned word of mouth into a force to be reckoned with. Within its first 30 days in business, without any press or advertising, Amazon.com was able to sell books in all 50 states and 45 countries. Jeff Bezos simply asked 300 of his friends and family members to spread the word. When it comes to the Internet, six degrees of separation is probably five too many.

The demographic cuts are so fine in these new media outlets that you can speak to precisely the right audience. For a fraction of the money you'd have spent on network television, you can run commercials on the Lifetime Channel, the Discovery Channel, or the Food Network and create a subcult for your brand. You can advertise in Teen People, Brill's Content, or Fine Gardening and use the Internet on the backswing. Suddenly, you've grabbed market share from the established brand that seemed to be king. And there's a good chance that the established company did not even see you coming.

The result, in almost any product category you can name, from microbrewed beer to mutual funds, is an exploding number of brand choices for consumers.

The third leg of this revolution is the unlimited access to information that consumers now have. What's occurred is the business equivalent of the fall of the Soviet Union. The Marxist state survived as long as it did only because it controlled the flow of information. It was the "mushroom" theory of public relations: "Feed 'em horse manure and keep 'em in the dark."

The Marxist capitalists—the big dominant corporations of the past—maintained their power in a similar fashion. Consumers had only limited access to information and distributors; therefore, corporations had to give them only limited choices. The pre—Internet marketplace was not unlike a Moscow grocery store before the fall of Communism: You could have the brown sausage, or you could have the white sausage, but you were going to have sausage.

Thanks to the Internet, however, consumers are no longer limited to what their local retailers are willing to stock, and comparison shopping no longer means expending considerable shoe leather interviewing a number of dubiously trustworthy salespeople. No matter what the consumer is searching for, from bird cages to mutual funds, a half—hour online will generate enough information to turn him or her into a walking, talking Consumer Reports.

The old economy was a product—push economy. Manufacturers made what they wanted to make, at the cost structures they liked. And then salespeople pushed those products off onto a gullible public. The new economy is a marketing economy, with the consumer firmly in charge.

WHEN THE CONSUMER RULES, ARROGANCE KILLS

Charles de Gaulle put his finger on the political implications of consumer choice when he expressed his own exasperation with the French: "How can you govern a country that has 246 kinds of cheese?" The truth is consumers who have that many choices are ungovernable, especially by despots. Choice teaches consumers to make increasingly fine distinctions between what they like and what they don't. In the process, it raises the bar for anyone trying to sell them anything from a political idea to shampoo.

Not surprisingly, many of the brands that ruled in a world in which consumers had less power are also—rans today. The truth is, brands are much more vulnerable than the executives in the dominant corporations of the past ever believed them to be. It was a particular collection of historical circumstances that kept many brands on top for so long, but the top executives of these brands mistook the size of their market share for the genius of their management. And now many of those brands are fighting for their very identity.

It's a pattern repeated over and over: Big companies that mismanage once—strong brands suddenly find themselves slipping in consumers' eyes. They go through a period of bad publicity and falling sales, and falling sales and bad publicity, that feels almost like a death spiral. Of course, many of them recover, mainly because their huge reserves of capital keep them from crashing completely. The best of them, like IBM, remake themselves into modern competitors, but none of them ever seem to achieve the same dominant market share they once had. They may be among the top brands, but the top is now shared.

Clearly, the arrogant old dinosaurs offer plenty of lessons in how not to win friends and influence people. But that leaves another question open: How do you compete in a world in which consumers have infinite knowledge and choice?

You can trade in commodities and try to win on price alone, a depressing downward spiral, given the almost limitless competition most businesses face today. That's why, in many industries, the smart commodities producers are turning their commodities into brands and commanding a premium for them. Increasingly, consumers no longer just reach for milk; they reach for Horizon Organic milk at almost twice the price. They don't drink unbranded water from the well or from the reservoir; they drink Evian or one of hundreds of other brands of bottled water at over a dollar for a little bottle.

If you don't want to compete on price alone, you can, of course, try to win on product features or service. But technology makes it unlikely that you'll offer anything that can't be copied by your competitors in record time.

Or you can join the battle of the brands. In that case, everything you once thought was important—margins, service, information systems, and even the products you sell—will have to become subservient to the brand. Because no matter how well you do these other things, consumers will never notice if there isn't an appealing brand out in front whistling for their attention.

Business theorists are now talking about the emergence of the "experience" or "entertainment" economy, in which the most successful companies no longer sell goods or services, but instead sell an experience. This is just what Nike, for example, does in its spectacular NikeTown stores. It's not selling athletic shoes based on product features; it's getting the consumer to buy those shoes by enshrining the whole idea of athletic competition. Starbucks is another example. No one would ever accuse it of just selling coffee. Instead, it sells the entire coffeehouse experience, meticulously controlled down to the reading material offered at the counter, which even included, for a time, its own magazine, Joe.

Actually, the phenomenon is at once simpler and broader than the ascendancy of shopping as entertainment, and it applies to brands like John Hancock that will never offer a purchasing experience that can be confused with a trip to Disneyland. It is simply human nature for people to prefer the richer experience to the more austere. And the experience of purchasing anything is richer if you buy a good brand, since a whole host of pleasant associations, by definition, accompanies that brand.

Why is it the brand, stupid? Because consumers have so many choices today, there is no reason for
them to buy anything that doesn't give them enjoyment. Strong brands are simply more enjoyable to buy, so you'd better have one if you hope to compete.