Building invicible brands

July 23, 2018

Warren Buffett once said, “In business, I look for economic castles protected by unbreachable moats.” With Game of Thrones (GOT) making castles once again a much-sought-after asset, his words sound a lot more contemporary than we would have thought a decade ago.

But can businesses be really protected by ‘moats’ like the castles of GOT? Well, the castles of GOT do not get much protection ever since the Dragons took to the air.

Competitive advantage, as described by Michael Porter in his eponymous book, has three legs. You can have a competitive advantage if you are a low-cost producer (producing in bulk, may be), or you are a truly innovative company (churning out new products like a rabbit), or you are focussed on serving your customers better than anyone else. So, it finally boils down to price (lower the cost, lower the price you will charge for the product), newness/innovation, or exemplary customer service.

With disruptive technologies rising even faster, like the dragons in GOT, will those competitive advantage-based ‘moats’ be able to survive in the long run? Just as ride-share disrupted the automotive industry, or accommodation-sharing is disrupting the traditional hotel industry, the new competitor you will face may come from the most unknown of places. Imagine you feeling safe with the wide moat around your castle and your look-out guy spots the dragons? Think of Elon Musk (who built a payment wallet PayPal) taking up the charge for electric cars.

As my friend explained to me over a rather fancy lunch at New York, overlooking the Trump Towers, there is just too much capital waiting to be invested. And a lot of this capital would fall into the category of ‘patient capital’—capital that is ready to wait for ten or twenty years to demand a return. In contrast, I was once told that the real estate sector in India especially, is funded by highly ‘impatient capital’. You get the contrast.

So, what can protect your business? What can be a potential ‘moat’?

Brands have proven to be able to withstand the trial and tribulation of time. In the text book Strategic Brand Management, Professor Kevin Lane Keller has listed a set of industries (mostly in packaged goods) where the market leader has not changed in the last ninety years or more. Take toothpaste, it is Colgate (Crest did give Colgate a fear in the US for a decade). In soft drinks, it is Coca-Cola. In chewing gum, it is Wrigley’s. In chocolate, it is Hershey’s. In paint, it is Sherwin Williams. In tea, it is Lipton. In toilet soap, it is Dial (it was Palmolive in 1923). In soup, it is Campbell.

A similar analysis could be attempted in India but since the country started seeing real competition in many categories only post 1990, we may fall short in our listing. But nevertheless, in India too, it has been Lifebuoy in soaps for over half a century (Santoor seems to have overtaken the long-term number two, Lux, last year); in toothpaste, it has been Colgate; in chocolate, it is Cadbury; in tea, it is Tata Tea (as Sangeeta Talwar tells us in her new book The Two Minute Revolution, Tata Tea edged past Unilever’s Brooke Bond for the first time in 2007); in paint, it has been Asian Paints (for over 40 years). Even after the acquisition by Coca-Cola, Thums Up rules (from 1977).

The same analysis may not work if you get into other categories. A few exceptions stand out. In cars, it has been Maruti Suzuki for more than a few decades. In motorcycles, it has been Hero (earlier Hero Honda). In banking, it has been State Bank of India. In life insurance, it has been Life Insurance Corporation of India.

We will soon run out of such perpetual leaders as we delve into other categories like refrigerators, televisions, washing machines, air conditioners, ceiling fans, cookers, mobile phones, laptops, and watches (Titan overtook HMT in the ’80s). In services, the leader board has changed many times; take airlines, telecom, mutual funds, etc.

So, is there a formula by which we can say with a reasonable amount of certainty that a strong brand can be a perpetual moat around the business?

How did the packaged goods brands manage to build such strong leadership positions and were able to defend it for decades? I think the answer is not as simple as we may assume.

Take packaged goods as the first case to analyze. I think many of these products fall under the category of ‘low involvement’; the consumer tends to categorize the purchase of these products into what consumer behavior experts call the ‘routinized purchase behavior’. The consumer tends to repeat the same brand, week after week, month after month. But what if a new offering is tantalizing? What if there is a great value offering? (We saw Nirma rise to great heights in the ’80s and Patanjali has done it in this decade). The leader board of packaged goods hides a lot more than meets the eye. Staying a leader in a legacy business like soaps or detergents does not mean that you fall asleep at the wheel. The leaders have managed to track trends and refreshed their products at regular intervals. The Colgate the average US consumer buys today would be significantly different from the Colgate her grandmother bought fifty years ago, quite positively. So, while the products are ‘low-involvement’ as far as consumers are concerned, they cannot be ‘low-involvement’ as far as brand management is concerned.

So, I am surmising that any brand that falls in the category that could be termed ‘high-involvement’ would find it more difficult to sustain its leadership position. Look at how rapidly Nokia dropped in the rankings. Even a legacy brand like Kodak seems to have vanished (in spite of the fact they invented digital photography).

High-involvement categories like automobiles, mobile phones, televisions, and computers call for a greater degree of vigil. Largely because there are disruptive technologies at play. For one, in all these categories, there are many disruptions happening at the same time. New entrants are coming in and changing the parameters of selection. Mobile phones got disrupted by touchscreens. And got disrupted again coming at a rapid pace, but there are also ‘platform’ level disruptions.

The same kind of multiple-level disruption is happening in numerous high-involvement industries. Automobile brands are gearing up for the new electrical revolution. But they are also worried about ride-share services making the concept of owing a car redundant. I suppose the same would be giving sleepless nights to fuel and car accessory brands.

Can a brand be the ultimate moat?

If you are playing in a legacy industry, a brand can be a good moat to keep. But the ultimate moat will be how well you understand the changing consumer mindset. How quickly can you adapt or adopt new ideas into your brand? How can you inculcate a design thinking mindset into your organization, to rapidly try out new ideas, rapidly prototype them, and either fly or fail fast.

The ultimate moat will be how well a brand understands the changing consumer, in the context of their lives and its interaction with technology. It calls for going beyond just the usual, traditional marketing research, but also seeing what the ‘fringe’ consumers are doing, what they are getting charmed by. And also understanding the larger socio-cultural context of consumers, the millennials and the post-millennials (also called iGeneration or Gen Z). I have explored some of the changing consumer trends in my book, Nawabs, Nudes, Noodles – India Through 50 Years of Advertising.

If we can understand the change, we can tailor our brand better and keep it as a nice big moat around our business. But we should continue to keep an eye out for the dragons.

Reference
*https://seekingalpha.com/article/4140481-spot-wide-moat-stocks