Emotional Blend of Coffee
 

W. Chan Kim and Renée Mauborgne

Companies such as Starbucks, The Body Shop and Swatch opened up new markets by changing the appeal of their products to consumers, say W. Chan Kim and Renée Mauborgne

In the late 1980s, Procter & Gamble, General Foods and Nestle held 90 per cent of the US coffee market. All three companies viewed coffee as a commodity: generic beans bought from roughly equivalent Brazilian and Columbian producers, roasted and freeze-dried using similar equipment, sealed in standard containers, and sold at a price. 

Apart from the name, colour of the jar and the advertising slogan, the coffee was remarkably similar. As in most commodity industries, there was heavy price-cutting and an unrelenting battle for market share to spread costs. The result was paper-thin profit margins and low growth. 

Then came Starbucks. While the big three sold a commodity, Starbucks sold a retailing concept: the coffee bar, offering relaxation and conversation, and coffee drinks made with quality beans, frothy and flavoured milks, creams, syrups and ices. 

While $3 for a cup of Starbucks' coffee is outrageous compared with the cost of a cup of instant coffee at home, consumers did not see it that way. They judged Starbucks as an indulgence, so the steep price appeared good value for money. 

With almost no advertising, Starbucks became a national chain in less than 10 years. And it is growing, with profit margins roughly five times the industry average. 

Competition in many industries converges on one of two bases of appeal. Some industries compete principally on price and functional performance; the appeal of these industries is rational. This was the case with coffee in the US before Starbucks. 

Other industries compete largely on feelings, glamour and human relationships, where a product or service is bought for emotional reasons. Cosmetics is one example. 

Rarely, however, are the products or services of an industry intrinsically and unalterably functional or emotional. Often companies have driven their industries in one of these directions based on competitive factors, and have unconsciously educated consumers about what to expect. A reinforcing cycle sets in between companies' behaviour and customers' de-mands. The result: functionally oriented industries are driven to become more so over time, as are emotionally oriented industries. 

Companies can often create new markets and recreate existing ones by breaking out of this convergent behaviour and shifting the functional-emotional orientation of their industry. 

The aim is to appeal to a completely different sense of self and purpose among buyers by transforming a product or service whose appeal is functional into one whose appeal is emotional, or vice versa. 

The opportunities are often enormous. Typically, emotionally oriented industries provide lots of extras that add to the sale price but not to functional performance. It may be possible to remove these extras to reveal a simpler, lower-cost business model that is often a welcome reprieve after years of emotional binding. 

Similarly, functional industries often have low creativity and have commoditised their products and services, leaving huge scope to stimulate demand by introducing emotion and pleasure of use. 

Swatch did for watches what Starbucks did for coffee. In the early 1980s, budget watches were considered a functional item that people bought to keep track of time. Citizen and Seiko, the industry leaders, competed by using quartz technology to improve accuracy and digital displays to make reading the time easier. 

Swatch set out to make fashion accessories. SMH, the Swiss parent company, created a design lab in Italy whose mission was to combine powerful technology with artwork, brilliant colours and flamboyant designs. 

Before Swatch's debut, people usually owned only one watch, because one watch fulfilled the functional need of keeping time and all watches looked the same. Swatch encouraged repeat purchases because people viewed it as a fashion accessory. 

In contrast to Starbucks and Swatch, The Body Shop created a new market in the cosmetics industry by shifting from an emotional appeal to a functional one. Contrary to industry orthodoxy, The Body Shop did not sell glamour, hope and fantasy: it sold health and well-being. While the cosmetics industry spent heavily on packaging, The Body Shop used plastic, refillable bottles. 

While the cosmetics industry spent heavily on technology and secret beauty formulas, The Body Shop did away with the expense by focusing on simple methods and traditional formulas using natural ingredients. 

While the cosmetic industry spent heavily on advertising and promises of eternal youth, The Body Shop drew attention to its natural formulas and their powers to polish, protect and maintain the skin and body. 

The result: it was hard to recognise that The Body Shop was part of the cosmetics industry. Its products and approach were so simple, under-hyped, reasonably priced and honest, they appealed to consumers' commonsense and led to the creation of a new market space. 

Many new markets are being created in service industries in much the same way. Sectors such as insurance, banking and investment have traditionally been emotionally oriented, selling human relationships and client bonding - "the relationship is the business". 

New companies are stripping this away to create dramatic change in price and performance. Direct Line Insurance in the UK, US-based Vanguard in index funds and Schwab in the brokerage industry are creating new market spaces by transforming emotional, human-relationship oriented businesses into high-performance, low-cost functional businesses. 

Where does your industry gravitate towards on the functional-emotional spectrum? Is it highly oriented toward one of these two bases of appeal? If so, your company may find new market space by shifting the appeal of your industry. 

The relevant questions are: if emotional in appeal, what can you eliminate and reduce in your industry's offerings to reveal a fundamental breakthrough in price/ performance for customers? If functional, what can you create that your industry has never offered to build emotion, image and a powerful message into the products and services of your industry? 

Next week, learn how Sony, Polo, Ralph Lauren, Accor and Champion Enterprises succeeded in breaking out of the strategic groups of their industry to create new market space.