Case Study #28: Microsoft Begins to Rebuild Its Brand Credibility through Windows 7 and Vertical Retail Integration

A good friend suggests that I write my next Stratelysis case study about Microsoft opening up its first retail store. I tell him that I will think about it, but joke that my “Apple-loyal” friends may not be too happy with this post. After much thought and deliberation, I want to give props to Microsoft for beginning to rebuild its brand credibility through the Windows 7 launch and vertical retail integration.

Unsuccessful products can negatively impact a company’s brand credibility and sometimes, reputation. It takes years for a company to regain confidence from existing and future stakeholders to overturn negative perceptions of the brand. Microsoft launches Vista in January 2007. Chief Executive Officer of Microsoft, Steven Ballmer, says: “It is the biggest launch in software history, and the broadest release ever”. Market researcher IDC says that Microsoft expects to sell 200 million copies of Vista to consumers and businesses worldwide in its first two years (Swartz, Jon. “Microsoft gets Vista launch off the ground”, USA Today. January 30, 2007). This is a very aggressive goal, but supported by a multi-million dollar marketing and sales strategy. As of early 2008, Microsoft sells 100 million retail copies, and this does not include 40 million plus retail licenses via various volume-licensing deals (Foley, Mary Jo. “Microsoft: 100 million copies of Vista sold at retail”, ZDNet, January 6, 2008). While there is some accuracy behind this push-driven sales forecast, we know that Vista isn’t received well by consumers or businesses. These problems range from security to digital rights management to memory protection.

Microsoft realizes it will be operationally challenging to overturn the negative perceptions of Vista through software optimization, servicing or recalls. Vista negatively impacts Microsoft’s brand credibility and its reputation.

During this time period, Microsoft considers a follow-up to Vista, and recently launches Windows 7. According to Microsoft, Windows 7 truly incorporates customer feedback: "Our customers co-create the product with us," said David Webster, general manager for brand and marketing strategy at Microsoft in Redmond, Wash. "We're using the customers' voice to tell our story." (Cringley, Robert X. “Will Microsoft 7 Change Our Minds About Microsoft”, USA Today. October 24, 2009). Microsoft 7 has user-friendly features such as “Snap” where window screens can appear side-by-side by simply dragging them to edges of the screen. The product development principles are represented through Microsoft’s “I’m A PC and Windows 7 was my idea” campaign. The personification of Windows 7 via its engaged customers can help combat Apple’s stodgy, unaccountable personification of PC in its marketing touchpoints. The marketing budget behind the Windows 7 is a fraction of the one behind Vista. The company is integrating good inbound marketing tactics to organically promote Windows 7. It is also possible to convert Vista into Microsoft 7. Overall, the company is taking a full-line approach to changing its brand perception.

Microsoft opens its first retail store in Scottsdale, Arizona and plans to open its second store on October 29th in Mission Viejo, California. Most companies sell products through some mix of direct-to-consumer and retail channels. Several industry verticals seem to be gaining more sales through direct-to-consumer channels as customers demand more transparency about products and services from companies. Ultimately, these channels should be integrated to create a consistent image of the brand. Product accountability via features and benefits is one of the several components of brand strategy. A customer must have mostly positive interactions with the product and other touchpoints of the brand through the entire product lifecycle so the brand can financially benefit from those interactions. A vertically integrated retail channel, like the Microsoft Store, indicates that Microsoft will be directly accountable for making sure the customer has a positive interaction through additional points of brand contact that may not be achieved through its non-vertically integrated channel. As the company continues to reinforce the “I’m A PC and Windows 7 was my idea” campaign, Microsoft Stores must be aligned with that message through store vistior interface, from the salesperson behind the checkout counter to technicians behind the service counter.

It has been less than week since Windows 7 and the first Microsoft Store launch into the marketplace. And it will take a few years to determine whether these product and retail strategies will rebuild Microsoft’s brand credibility. Overall, the Microsoft case study can serve as a benchmark on how to organically grow through customer-driven innovation, brand accountability and simply learning from prior mistakes.

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Case Study #27: Walt Disney Co. May Find Significant Treasure in their Keychest

During one of the worst downturns since the Great Depression, one company enters the very competitive portable PC segment and acquires a major entertainment brand. Walt Disney Co is supplementing its inorganic growth strategies with an organic growth strategy. Today, Disney announces that it will enable entertainment companies to adapt their business models to a new reality in which consumers increasingly rely on computers and cell phones in place of DVD players and TVs. The technology, code-named Keychest, could contribute to a shift in what it means for a consumer to own a movie or a TV show, by redefining ownership as access rights, not physical possession (Smith, Ethan. “Disney Touts a Way to Ditch the DVD”. Wall Street Journal, October 21, 2009).

How does the Keychest work? The article says that consumers would pay a single price for permanent access to a movie or TV show across multiple digital platforms and devices—from the Web, to mobile gadgets like iPhones and cable services that allow on-demand viewing. It could also facilitate other services such as online movie subscriptions. Keychest uses the same "cloud computing" logic that underlies Web-based applications, such as Google Docs, permitting users to store files and photographs on remote Internet servers and access them from anywhere, rather than keeping them on their own computers (Smith).

This is a very bold, yet sustainable strategy that can be appealing to various Disney and non-Disney segments.

It is evident that Disney is evolving its brand into technology and entertainment sub-verticals as a way to offset losses from declines in amusement park ticket and consumer product purchases. Most importantly, Disney not only generates an additional revenue stream through Keychest subscribers, but also potential cost sharing among participating distributors, studios and brands. The data generated through subscription will be very valuable for marketing and agency specialists. Most importantly, the Keychest strategy is fundamentally based on market-driving factors such as the mobility of mediums, accessibility of wireless hubspots, affordability of hardware and the overall desire to exert control over the customer experience.

Right now, Sunday night is perceived as a great night for television. But, that doesn’t have to be the case anymore. Once you have your key from Keychest, any night (even Saturday night) can be a great night for television as that is in YOUR control.

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Case Study #26: Where the Wild AND Revenue Generation Things Are in the San Diego Zoo

The last time I visit a zoo is over twenty years ago. As we age, we engage in different kinds of entertainment and leisure. Today, a ten-year-old happily watches panda bears at the zoo munch on leaves. Twenty years later, that ten-year-old will most likely be engaged with a different form of entertainment on a weekend. This impacts the growth of brands, such as Disney and Mattel, or non-profit organizations, such as the Lincoln Park Zoo or San Diego Zoo, whose core audience segments are children and pre-teens. According to the Population Association of America, 21 million children who are under the age of 5 today will be in middle and high school in 2017. Currently, this segment represents 6.8% of the total U.S. population. In 1983, children under the age of 5 represent 8.5% of the total U.S. population. As time goes on, the percent of children who are under the age of 5 will decline as a percent of the total U.S. population and this will affect the growth of brands or associations whose core audience segments are children and pre-teens.

This morning, I find a great article in Businessweek about the San Diego Zoo and why it is a great example of growth through innovation. The San Diego Zoo has 4.5 million annual visitors, generates $200 million in annual revenues and will show a $13 million operating profit in 2009 (Scanlon, Jessie. “San Diego Zoo’s Newest Exhibit: Innovation”. Businessweek, October 14, 2009). But, Chief Financial Officer Paula Brock recognizes that the long-standing model of funding conservation research and educational initiatives from entertainment revenues (tickets, food, and merchandise) and donations cannot be maintained (Scanlon).

Concession stands are main revenue streams for movie theaters, ball games and zoos. Not only do the target zoo audiences shrink over time, but a weakened economy puts pressure on incremental spend above memberships fees and admission prices. Reducing the inflated price of goods at the concession stands may drive some demand, but not cover operational costs in the long-term. This will inhibit the funding for conservation research and educational initiatives.

The San Diego Zoo aligns with a consulting firm and its own employees to understand how to increase its revenue streams through diversification. After the San Diego Zoo embraces its thought leadership as a conservation entity, it deploys a three-pronged strategy to communicate its message. The Sand Diego Zoo communicates its core competencies of conservation through partnerships discussing environmental issues, online and offline experiential zoo activities and conservation consulting. All of these touchpoints are very integrated and consistent in boosting San Diego Zoo’s competitive advantage as a leader in conservation. These activities will offset declines in revenue from target zoo audiences by diversifying in relevant areas that are of growing global importance.

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Case Study #25: Dyson Achieves Close to 50% of Total Vacuum Cleaner Sales in Last Three Years

The founder of the Sea Truck, Ballbarrow, Trolleyball and Wheelboat is inspired to extend his innovative thought process in improving a practical application: Cleaning, and specifically, vacuuming. Thirty years ago, James Dyson notices that a bag vacuum cleaner loses suction power as dust quickly clogs the pores of the bag and blocks airflow. Dyson feels this is a counter-productive process.

Over 5,000 protoypes later, Dyson designs, manufactures and distributes a line of suction-free vacuum cleaners with dual cyclone technology. Dyson vacuum cleaners are significantly more expensive than comparable models, but the company experiences tremendous growth since it expands in the United States. In 2004, Dyson becomes the U.S. number two upright vacuum cleaner brand, and expects to sell 900,000 units by the end of 2004, a 350% growth rate from 2003 (Hall, James. “The Dyson vacuum is cleaning up in the US domestic market”, Telegraph UK, November 2004). Within ten years, Dyson is able to capture share from its direct competitive set with a “function-meets-form” design without lowering its transaction price points to targeted distributors. Since 1993, Dyson’s vacuum cleaner sales to date are 24.5 million units (2007), of which 10 million are sold in the last 3 years (Dyson Press Release “Thought You Knew What a Handheld Could Do? Think Again”. September 2009).

Dyson sells a little less than 50% of its total vacuum cleaner sales during a global economic downturn.

Experts say that the last recession officially starts in December 2007 so declines in gross domestic product begin earlier in the calendar year. So, what are the ingredients of Dyson’s success during an economic downturn? Here are some “stratelytical” insights for their vacuum cleaner sales successes:

• Dyson diversifies into other product lines, such as handheld vacuums, personal fans and hand dryers. This helps boost sales of the flagship offering. For example, someone who decides to wash their hands after using a bathroom at a restaurant is most likely relieved to dry their hands in a Dyson Airblade hand dryer instead of another hand dryer. This creates a positive association for the end-user and makes them consider buying a Dyson vacuum cleaner. This person may be interacting with a specific product, but they are having associations about the entire brand.

• Outbreak fears from E.coli, swine flu and other diseases create an incredible global focus on preventative self-health actions. Investing now in a state-of-the-art vacuum cleaner or hand dryer can minimize the spread of parasitic germs. This may be less expensive than visits to the doctor or hospital in the long-term.

• The complexity of Dyson’s product technology is simply communicated through market-facing touchpoints, ranging from the Dyson Ball in the vacuum cleaners to the airflow power from the Dyson Airblade. Videos of these touchpoints are in the right hand navigation bar. This form of transparency increases level of customer confidence for the Dyson brand. This can be translated into higher sales and profits for the company.

The company’s latest innovation is a handheld fan called the Dyson Air Multiplier. This fan does not have any blades: http://cli.gs/8u5HYR. It is exclusively available at the Dyson online store and certain design stores. Dyson is a company to watch as it “airs” more innovations in the short-and-long-term.

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Case Study #24: TOMS Shoes, Inc. One for One Movement Represents Global Social Responsibility

I blog about how brands across a wide range of industry verticals weather this economic storm, albeit receding, through product innovations, organizational collaboration and extensive analysis and research. It is my goal to remain aligned with the Stratelysis brand promise.

After learning and reading about TOMS Shoes, Inc. (www.tomsshoes.com), I cannot help but to dedicate today’s post to Chief Shoe Giver Blake Mycoskie and his global shoe giving movement. Does Mycoskie innovate something new in the footwear category? Not really. Does he have a sophisticated quantitative methodology to accomplish a global shoe giving goal of 300,000 units by the end of the year? Perhaps, but we don’t have transparency behind the rationale of that goal. Mycoskie has support from several stakeholders to achieve his vision. Read about his movement – Wouldn’t you want to be involved?

But, Mycoskie’s title of Chief Shoe Giver is what makes me want to extend Stratelysis updates into another area of research – Being a successful global brand exclusively in context of global social responsibility.

One major factor in securing funds to execute a business is sizing and forecasting customer demand. And when the rest of the “ducks are lined up” in a business plan and blessed by a group of investors, an organization is created and soon begins its life. People are hired, receive titles and execute their roles in context of the business strategy.

Three years ago, Mycoskie visits Argentina and sees several children walking around without shoes (market sizing) and realizes that children lacking footwear is a major issue in the developing world (market forecast). So, he creates TOMS Shoes, Inc.(blessing of the business plan) and gives himself a title to execute his role in context of global social responsibility (Chief Shoe Giver who wants to give 300,000 pairs of shoes to children in need). So, Mycoskie’s business is not built on his identification of a profitable niche of global shoe customers. Rather, TOMS Shoes is built on the identification of a major issue in the developing world. The “customers” definitely do not represent a “profitable niche” – Their feet of these children are sadly bruised and cut because of a lack of proper, if any, footwear.

TOMS Shoes is a business, but let’s think about the margins for the One for One movement. For every shoe that is purchased from TOMS Shoes, Inc., one pair will be donated by the company to a child in need. Let’s say TOMS shoes hits their sales goal of 300,000 units by the end of this year. I will assume the average transaction price of a shoe is $60. That is $18 million in shoe revenue. Assuming a 50% gross margin, 30% of revenue for SG&A and the unavoidable high corporate tax rate, the net profits from the shoe product line will be about $4 million. If it costs half of the average transaction price to manufacture the shoes and an incremental amount above that to donate the shoes, Mycoskie may likely run negative profitability for his shoe business.

There are a few sources that help Mycoskie offset these losses. First, his business sells other items besides shoes, such as apparel and stickers. These items are lower in price than the shoes, but generate an additional revenue stream for the company. Also, TOMS Shoes distributes the shoes via recognized 501(c)(3) non-profits and Non-Governmental Organizations (NGO’s). It partners with Friends of TOMS, a 501(c)(3) non-profit organization that creates and coordinates avenues for further involvement in the TOMS One for One movement. This includes Shoe Drop Tour volunteer opportunities. Also, TOMS Shoes aligns with other brands to support its vision. TOMS Shoes works with Ralph Lauren Rugby to distribute one shoe model: http://tr.im/Br6a. AT&T works with TOMS Shoes to work on the “More Bars In More Places” campaign. That is when I first hear about TOMS Shoes. Partnerships help boost brand awareness while sharing operational costs.

These are some of the several efforts to help TOMS Shoes sustain its business so it can continue to do achieve its vision of global social responsibility. Please see the videos on the right-hand navigation bar to see how this brand is impacting the world.

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Case Study #23: Zara’s Operational Values Grow Brand and Business Position in 2009

As I sweated bullets at the gym yesterday from a two week hiatus from exercising, I was simultaneously reading Businessweek’s 2009 report on the 100 Best Global Brands. Interbrand is the reputable firm that works with Businessweek to publish this report. As I scan through this list while maintaining my balance on a stepmill moving faster than it should, I am not too surprised by the rankings. I decide to analyze the delta in rankings (2009 to 2008). Certain brands lose and gain their position, but maintain a competitive spot in the top 50. Zara moves up twelve points to be ranked number 50 this year from number 62 last year. Today’s post will be dedicated to Zara and how it achieves business and brand success during one of the worst economic recessions since the Great Depression.

Zara is the flagship brand for Europe's fastest-growing apparel retailer Industria de Diseño Textil (commonly know as Inditex). Industria de Diseño Textil, S.A., together with its subsidiaries, operates as a worldwide fashion distributor. The company also does textile design, manufacturing, and distribution. It serves customers in various sales formats, such as Zara, Pull and Bear, Massimo Dutti, Bershka, Stradivarius, Oysho, Zara Home and Uterqüe. The company operates 4,359 stores. Industria de Diseño Textil is currently headquartered in Arteixo, Spain.

Zara runs about 1,520 stores, including some 230 Zara Kids shops, in more than 70 countries worldwide, including China where is has about two dozen locations. Zara has about 40 shops in the US and 60 in Mexico. The chain sells women's, men's, and children's apparel and also offers plus-size and maternity lines to its larger customers. Zara Home, which sells home fashions, has about 250 stores, in about 25 countries. Zara is Inditex's principal chain and accounts for about two-thirds of its parent company's sales.

Zara’s success in 2009 can be attributed to its organizational collaboration.


They institute a “fast fashion” system which “depends on a constant exchange of information throughout every part of Zara's supply chain—from customers to store managers, from store managers to market specialists and designers, from designers to production staff, from buyers to subcontractors, from warehouse managers to distributors, and so on. Most companies insert layers of bureaucracy that can bog down communication between departments. But Zara's organization, operational procedures, performance measures, and even its office layouts are all designed to make information transfer easy” (Ferdows, Kastra, Lewis, Michael A., Jose A.D. Machuca. “Zara’s Secret for Fast Fashion”. Harvard Business School: Working Knowledge for Business Leaders, February 2005). Continuous knowledge transfer within the supply chain is a critical need to distribute products according to customer demand, not a mercantile system where manufacturing output creates excessive supply. For example, Zara can quickly identify a trend to having clothes in it stores in 30 days (Dutta, Devangshu. “retail @ the speed of fashion”. Third Eyesight, 2002). Zara is an excellent example of vertical integration and swiftly makes intelligent decisions to adapt their strategy based on market trends. The result is a very streamlined and efficient approach to inventory management, thereby reducing costs and increasing profitability.

The economic conditions in 2005 are far different than they are now. Several fashion brands lament about declines in sales and profitability even as they spotlight luxury items at lower retail price points and heavily discount products to turn inventory. Zara, on the other hand, is not experiencing the same issues. Given Zara’s focus on vertical integration, excellent inventory management and market demand, one would assume it could invest in distributing more expensive, higher-end items to increase its profitability levels. Four years later, the brand stays true to its low price, very chic offering to young people. Since the company is grounded in immediate and actionable data transfer across the supply chain, they are able to immediately anticipate changes in purchase behavior and react intelligently at the retail level. The average transaction is $27. Zara also plans to open 370 to 450 locations this year and its current logistics system can handle growth until 2012 (Rohwedder, Cecilie. “Zara grows as retail rivals struggle”. Wall Street Journal, March 26, 2009). While Zara is headquartered in Spain, it has a tremendous global focus and offsets losses it faces in its home market. The gross domestic product for Spain is forecasted to be -4.0% in 2009 and consumer expenditure has fallen from $951,754 million in 2008 to $908,289 million in 2009 (Euromonitor Country Factfile – Spain). The unemployment rate in Spain is forecasted to go over 20%. Dominic Bryant, an economist with BNP Paribas, said: “The momentum is clearly there for something well above 20 per cent, it's odds on, really. My forecast is that it gets to something around about 23 per cent.”

There is a lot to glean from Zara’s success in the fashion industry. It is not surprising why the company moves up 12 points in the Interbrand study. As customers become more discerning about consumption, it is important to make sure businesses are aligned at all levels to not only serve the buyers, but sustain their growth over a long period of time.

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