Some companies shouldn't grow
Many big corporate brands are overextended

Several of the largest corporations in the U.S. are headed for big trouble from their relentless "growth at any price strategies" says one of the world's top marketing consultants.

"The urge to grow (can cause) companies to become unfocused," writes Jack Trout, in his upcoming book Big Brands Big Trouble. "While growth might be an admirable result of other initiatives, the pursuit of growth for its own sake is strategic error."

These comments come from someone with impeccable credentials as a marketing commentator. Three decades ago, Trout and his ex-consulting partner Al Ries, popularized one of the most popular marketing strategies called positioning, which involves differentiating a brand in the minds of customers and prospects.

Positioning is based on the principle that most people can only associate one brand with each product category. So the trick for upstart brands is to "create" a new category in customer's minds, in which their brand is number one.

For example in the soft drink industry Coke early on positioned its product as "the real thing." In response, Pepsi, came up with the slogan "the choice for the new generation," which made its brand number one - among young people.

Today as president of Trout and Partners, Trout travels the world, giving strategic consulting advice to Fortune 500 corporations.

His new book, is a review of how some of the biggest brands of the last decade such as Xerox, Hewlett Packard and Miller Brewing, got into big trouble, mostly by trying to expand into sectors outside their areas of expertise.

"CEOs are under incredible pressure from Wall Street to show consistent sales and earnings growth," said Trout in a telephone interview. "But at some point, their companies get so big, that they have no choice but to expand into areas that maybe they shouldn't."

Trout's biggest beef is against CEOs who dilute the value of their priceless corporate brands, through "brand extension." For example A.1., which makes a terrific steak sauce, tried to leverage the value of its A.1. brand, to market chicken sauce.

These brand extensions are tempting because in the short term they often lead to increased sales. But it's rarely a successful strategy in the long run, says Trout, because the original brand's identity gets diluted. People soon start asking, "is it a steak sauce or a chicken sauce?"

General Motors is one of the key culprits in butchering successful brands. The company initially set up its models according to price. The hope was that people would buy a cheap entry level vehicle, and then, as they got older, would move up the ladder into the more luxurious models.

Chevrolet, was the starter brand, followed by Pontiac, Buick, Oldsmobile, and then Cadillac. There were sharp distinctions between the divisions. The most expensive Chevrolet sold for less than the cheapest Pontiac.

But gradually division heads came under such pressure to grow, that they began moving in on each other's turf. And soon it was hard to tell one GM model from another.

"What's Chevrolet?" asks Trout. "It's a small car, big car, sports car, truck - in other words, the Chevrolet brand means nothing."

Of course the GM story-- like many of the failures recounted in the book --is old news, but Trout, a gifted raconteur, manages to make his examples current by putting them into the context of modern developments.

Much of business literature today focuses on corporate successes that people are supposed to used as role models says Trout. But many of very successful companies such as Microsoft and Netscape, are really just freaks of modern markets, whose success can't be duplicated. But studying failure is sometimes easier, and can offer a better analysis of what works and doesn't.

If you believe Trout, because of the pressure for growth at any cost, companies have gotten so big, that there is not much room for many of them to expand in their own markets anymore.

"A $40 million (in sales) company needs only $8 million to grow 20 per cent," writes Trout. But "a $4 billion company needs $800 million." Few markets are that big, which means that the more successful a company becomes, the more difficult it becomes to maintain their expansion pace.

Trout cites a study by the Washington D.C. based Corporate Strategy Board, which identifies a ceiling -- at about $30 billion in annual sales -- at which companies are likely to run into problems as they climb.

In 1999, the annual revenues of the 50 largest U.S. corporations averaged about $50.8 billion, so a lot of them are going to be hitting speed bumps writes Trout.

"We have a couple of squadrons of behemoths flying in the clouds and headed for stalls of one kind or another. Look out on the ground."

Photo: Jack Trout, president of Jack Trout and Partners, who travels the world doing corporate strategy consulting for Fortune 500 companies, says many of them are going to hit severe "stall points" in their growth.

 

 

E-mail can be sent to Diekmeyer at: peter@peterdiekmeyer.com

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