Urlocker On Disruption

Heineken: Disrupting a Commodity Business

This week, guest columnist Zack Urlocker combines two of our favorite topics: disruption and beer! 

Most of the time when people talk about disruption they focus on  high-tech companies: Google, RIM and others.  Certainly these companies have used technology innovation to disrupt their markets and solve new problems.  But sometimes disruption is about improving the experience, accessibility or convenience of a product through distribution or delivery, such as NetFlix did in the DVD rental business.

Changes in distribution or delivery can in turn can unlock new uses and expand the market; especially if the changes are difficult or expensive for competitors to copy.  Part of NetFlix's success is no doubt because they got a very long lead ahead of rival Blockbuster which did not recognize the convenience introduced by using the post office as a delivery channel and did not want to undermine its core business.

In this example, we'll look at one of my favorite products: beer.  Heineken competes in one of the most commoditized and conservative markets around.  But instead of trying to innovate based on a new flavor or new style of brewing, Heineken focused on creating a packaging system that provides a better customer experience and likely increases consumption.

What is the Heineken DraughtKeg?  From the consumer perspective, it's 1.33 gal (5 liters) of premium draft imported beer at a cost per serving that's just slightly more than a typical twelve-pack.  That gets you around 14 12 oz servings, depending on how much foam you like. The price is just under $20.

What makes the DraughtKeg unique is that, as its name implies, it's real draft beer from a keg, only scaled down for convenience.  Testers report that it tastes fresher than bottled beer, which is due to the way it is dispensed via CO2 cartridge --just like draft beer in bars.  But unlike a normal 70 pound keg, you can get it at your local store without a pickup truck and a team of guys.  The mini-keg weighs around 12 pounds (5.5 kg) and is fresh for 30 days after it's opened.  So the Heineken DraughtKeg provide a  keg taste experience without all the hassle and without the need to consume the entire keg in one sitting. (Though you can if you want.)   No doubt the DraughtKeg will be featured at many home parties in the fall.  It's perfect for watching a game on TV, an office party, or any other social occasion.  The DraughtKeg has some novelty, which in itself add to the fun. 

Development of the DraughtKeg took Heineken nearly 10 years and it cost them more than $15 million dollars to build a new production line.  Because Heineken is selling a premium beer, the added fixed costs can be ammortized over the price of the beer at about a penny an ounce compared to bottled beer.  This 8-9% the cost increase is not negligeable to consumers, but it is well within the reach of the premium beer drinkers Heineken is targeting.  This turns out to be an important part of Heineken's strategy: it's not competing at the low-end of the market.  As a result, Heineken is unlikely to be challenged by a low-end Budweiser Keg.  The margins at the low-end are too thin to support this type of a delivery system. 

Features or Convenience?  If you're in a business that is increasingly being commoditized you might be tempted to try to come up with new features (or in this case, flavors) to stand out.  But in a commodity market, that may be the wrong strategy, especially if the product has already surpassed the quality expectations of most customers.

The DraughtKeg is not a new trendy style or flavor of beer.  In fact, it's the same Heineken beer they've been brewing for more than 100 years.  What's new here is the packaging and the delivery system.  In other words, they improved the experience in how their commodity is delivered to the consumer. 

And since they did not change the proven Heineken recipe they reduced one of the key risks in consumer marketing that customers would not like the change.  Of course, there is still risk in any consumer product changes, but not as much as, say, introducing a New Coke recipe or launching the Zima malt beverage.  Both those moves cost their companies many millions of dollars in losses.

According to Forbes, the Heineken DraughtKeg provides the company not only with added revenues (estimated $300 million) but also better shelf space from retailers due to the higher margins.  So it looks like this move will payoff for Heineken and help them stand out in a crowded market.

Questions to consider:

• Are there barriers your customers have in accessing or using your product?
• Can you improve the convenience and accessibility in such a way that customers will use more of it?
• Are there new uses for your product beyond the mainstream that can provide opportunities for growth?
• Are there ways you can stand out in the market without changing the product itself?

The Heineken commercial below clearly illustrates some of the perils of home-kegging before the DraughtKeg.

Zack Urlocker is a software executive and regular blogger on open source technology at TheOpenForce and InfoWorld and about music at GuitarVibe. 

** Other Sources **

Forbes has a good article "The Keg That Scored" on the development of the DraughtKeg and the engineers behind it.

Established Magazines Sink But New Titles Bubble Up

The game has changed for publishers of business magazines, as described in today's Wall Street Journal.  The old days of selling (or giving away) subscriptions to well-heeled executives and  piling on the ads for cars and financial services no longer seem to work.

Witness the declining ads at top-tier magazines like BusinessWeek and Fortune, as well as the thinning ranks of relatively younger titles with the demise of Business 2.0 and periodic reports of financial strain at Red Herring (again.)

Here are some of the warning signs of disruption that the Journal observes:

• Established management playbook fails
• Established suppliers continue to improve their product by old standards (redesigns and reorgs)
• New entrants with strange business models make inroads (Internet)
• New competitor takes share and is dismissed as 'inferior' (Conde Nast's Portfolio magazine)

Out With the Old...

I happened to be reading Warren Buffett's latest annual letter to shareholders yesterday and his comments on newspapers, including the Buffalo News, which his company owns, seemed relevant to magazine publishers:

"Eventually eroding fundamentals will overwhelm managerial brilliance.  And fundamentals are definitely eroding in the newspaper industry, a trend that has caused the profits of our Buffalo News to decline. The skid will almost certainly continue.

Almost all newspaper owners realize that they are constantly losing ground in the battle for eyeballs. Simply put, if cable and satellite broadcasting, as well as the internet, had come along first, newspapers as we know them probably would never have existed. However, the economic potential of a newspaper internet site – given the many alternative sources of information and entertainment that are free and only a click away – is at best a small fraction of that existing in the past for a print newspaper facing no competition... the days of lush profits from our newspaper are over."

And In With the New...
Of course not all magazines are dying. And there are occasionally startups that show a path to a new emerging market.

Muslim Girl, published by ExecuGo Media strikes me as a new disruptive medium because:

• It reaches a new market that was previously deemed unimportant to mainstream media: 400,000-500,000 Muslim girls in North America
• It is global in its appeal
• There is a worldwide shortage of popular media content directed at Muslims

One though: Disruptive products typically need disruptive distribution channels to establish themselves. The reason:Muslim Girl will struggle for space on news stands and will not initially be able to lure mainstream advertisers away from Seventeen, CosmoGirl and other established titles. Muslim Girl looks great in print and on the web, but wouldn't a mobile version on cell phones appeal to hundreds of thousands of teenage Muslim girls? Teenage girls and cellphones go together well. 

WSJ: Wal-Mart Disrupted?

The Wall Street Journal ran an eye-opening front page that explored the demise of Walmart (full story).  It's a great read and the major points are:

• Consumers are changing: Price may matter less
• Quality may matter more
• Big consumer goods suppliers are turning away from Wal-Mart
• Growth at competing stores is outpacing Wal-Mart

And from an investor's point of view, two clear warning signs:

• The stock has collapsed in the past five years
• There's more downside

Is Wal-Mart being disrupted? Clearly the company has continued to play the same game in a changing environment. And the results have not come through. Here are a few questions for retailers to consider:

• Is it time for a "Buy USA" retailer that supports domestic suppliers over cheaper, usually Chinese-made goods?
• Are there signs that consumers are ready to move in that direction?
• DId your view change following the Chinese-made recalls this year?

**Other sources**
Not everyone agrees that Wal-Mart is so easily undone.

SeekingAlpha has a good take with commentary.

Careers: Should You Pack Your Parachute?

Following his recent article "Are You A Sitting Duck?" guest columnist Zack Urlocker shows the steps you should take to improve your own position if your company is being disrupted.

Just because it's time to pack your parachute doesn't mean you should jump immediately.  But you may need to at some point.  Let's face it, it's a heckuva lot more fun to be a disruptor than to get disrupted. 

Five years ago, back when I was in the enterprise software business, I saw a repeated pattern whereby customers would go for the least complex solution using open source technology.  Customers would readily admit that the open source solutions weren't as good as the commercial products we were trying to sell.  But they still made their choice.  I realized that there were several key trends in the software industry that were likely to wreak havoc on the old model of selling expensive perpetual licenses.  (And let's be clear, it was a good model for 20 years!)  The new trends were:

• Open source software
• Hosted software as a service
• Distributed and offshore development

And even back then it was clear that the force of these trends would be unstoppable.  Some companies would succeed and some would fail, but it seemed obvious that it was better to be competing with the force of change on my side. 

While it's clear that jumping to a new disruptive company has its risk, there's also risk in staying with an old line business model.  You don't want to be the last person selling IBM Selectric typewriters, no matter how good you are at the job.  At some point, if you stay too long in the old world, you fail on the basic IQ test and are considered damaged goods.  Many times I've seen hiring managers pass over the resumes of candidates that were in companies that were considered to be "the walking dead."  You may think that 15 years loyalty to a company will impress a new employer, but not if its because you were asleep at the wheel. 

And even if you don't leave your current position, you can be more valuable if you've got an awareness and understanding of what the disruptors are doing and how you can apply some of those techniques in your existing company. 

Here's a set of steps you can take to improve your situation:

• Make sure you're up-to-date with your skills. In many cases, disruption is based on a significant shift in the market place.  That could be a technology shift or a change in market dynamics or distribution.  The most important thing you need to do is make sure you have a real understanding of the underlying changes.  You can't just be an buzzword compliant either.  You need to have hands-on experience with the new way of doing business, even if it's on a limited basis outside of your main duties.  In new industries no one expects you to be an expert, but they won't necessarily pay senior level salaries for someone with old school experience either.  If there are courses or workshops available to help you learn the new skills, sign up.  Even if your company doesn't foot the bill.  After all, it's your career, not theirs.
• Get involved in the disruptive projects in your current company.  Many incumbents will experiment with disruption.  They may kickoff a skunk works project or some kind of business partnership, licensing or reseller deal to get them in the game.  Make sure you're a part of these efforts so you can get some exposure. By being open to trying new things, you may be able to help your company maintain its revenues by starting a new disruptive business inside the organization.  Don't expect a lot of others outside the new group to go out of their way to help you.  You may even view you as unwelcome competition.  The likelihood of a disruptive business coming out of a large incumbent is not thigh, but you'll at least get some exposure that can be helpful.  But make sure it's real action, not just a task force to study what disruptive firms are doing.
• Start disrupting -- even if you aren't getting paid for it. If there's no sign of disruption going on in your company, it may be time to suggest to your boss that you kick something off.  Don't expect that you'll get a cushy budget to make things happen.  In fact, be prepared to do this on top of your current assignments and within your existing budget.  And if you still can't get the approval to do it on company time, all the more reason to start doing it on your own.  If you're in publishing get involved with new media.  If you're in software, start experimenting with open source software like the LAMP stack (Linux / Apache / MySQL / PHP).  Don't try to boil the ocean and change everything in your company.  Rather, figure out how to take small, incremental steps that can help build momentum and experience in new areas. 
• Build a new network. Most likely your old contacts are going to be in the same situation you're in: trying to come up to speed in a new skills while putting on a brave face.  While you don't need to abandon your old contacts, you will need to develop new ones.  Get out to the conferences and seminars and start building bridges.  Meet people from the disruptive firms.  Understand what's going well and why.  Don't be critical or defensive.  And don't tell them why they've got it wrong or why they will fail.  Ask lots of questions and you'll likely learn some ideas that will help make your current company more successful or may be useful down the road.  If there are panel sessions on conferences that mix the old and the new, get involved.
• Learn it, teach it, write about it.  Even if you don't have the opportunity to take part in new disruptive efforts in your current position, you will need to demonstrate to others that you grok the new model.  One way to do this is to explain the new model to others.  You could become "the disruptive guy" inside your organization by helping explain to others.  You don't want to be a zealot or naysayer about how your current model is broken, but if you can give input to others in the organization, that's a great way to build experience and credibility. 
• Do your homework before you jump. If you've developed an in-depth understanding of the changes that are taking place in your industry and you've got some visibility outside your organization, sooner or later you'll be in a position where you can cross over to the disruptive side. But don't just jump to the first opportunity.  Make sure you evaluate carefully the risk in any new venture.  You'll want to have a good understanding of their finances, existing customer base, as well as actual and projected growth.  Talk to their customers, the management. These elements will help you get a feel for what stage the industry is in and whether the apparently disruptive play is really taking hold in the market.  Most candidates will spend a lot of time negotiating compensation and trying to hold out for their "old school" salaries and bonuses.  In my view, much of that is misguided.  The biggest determinant in your overall compensation will be based on performance incentives (options, bonuses) that depend on whether the new business is successful.  So you are better off spending time to assess the risk level of the firm rather than worrying exclusively about your compensation.   

Zack Urlocker is a software executive and regular blogger on open source technology at TheOpenForce and InfoWorld and about music at GuitarVibe.