Flip (19 page)

Like Toyota, BMW took serious alternative energy action long before it was cool to do so. First demonstrated at Expo 2000, the BMW 750hL is the culmination of three decades of research into hydrogen-powered vehicles. BMW sees the use of hydrogen as the answer to many environmental problems, since there are no harmful emissions, no depleting of resources and no danger to the atmosphere.

The heart of the 750hL is a hybrid, twelve-cylinder combustion engine with two independent electronically controlled fuel-induction systems. These systems allow the 750hL to run on either petrol or hydrogen. Now before you get too cynical about this high-priced twelve-cylinder beast, BMW has also developed a Mini Cooper using the same BMW clean-energy system.

Working with Shell Oil Company, BMW has developed a technology for dispensing hydrogen from a filling station's pumps into a car's fuel tanks. The world's first fully automatic hydrogen filling station was opened in May 1999 at the Munich Airport.
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My hat is off to both Toyota and BMW – and Honda has been aggressively developing similar technologies too – for investing long before the market demanded that they do. Markets may be efficient, but in this case they would not have driven innovation soon enough.

Or consider the snowboard. In 1966 an American entrepreneur named Sherman Poppen bolted two pairs of children's skis together to make a stand-up sled for his daughter. As soon as they saw it, all the neighbourhood kids wanted one. Poppen's wife combined 'snow' with 'surfer' and dubbed the contraption the Snurfer. The Poppens licensed it to the Brunswick Company, a sporting goods manufacturer, which sold more than a million Snurfers through sporting goods, toy and department stores.

The Snurfer was a toy that couldn't be used on more than a sledding hill. But in the mid to late 1970s, a handful of entrepreneurs who had been exposed to it as teenagers began trying to develop what became the snowboard. One of the handful was Jake Burton, who in 1977 began shaping snowboards in a barn in Vermont and selling them out of the back of his Volvo.

The proto-market seeded by the Snurfer kept Burton's business alive, but snowboarding remained an underground sport confined to sledding hills. It took five years of lobbying on Burton's part before the first ski resort, Suicide Six Resort in Vermont, opened its slopes to snowboards. Throughout the 1980s and early 1990s, snowboarders struggled to reverse bans against them at major skiing areas.

By the mid 1990s, ski resort operators were finally waking up to the flip: snowboarding didn't threaten their businesses, it brought a populous new, young demographic to their facilities, an infusion of fresh blood that they desperately needed. Snowboards appealed to young people who loved surfing and skateboarding, cost a lot less than skis and were much easier to learn to use. As the snowboard express gathered speed, ESPN mounted the first Winter X-Games in 1997, scoring big ratings, and in 1998 snowboarding competition came to the Winter Olympics, where it has become as high profile as alpine skiing and figure skating.

Today snowboards and related products are a US$3 billion a year industry that continues to grow by leaps and bounds. And at the centre of it all, reaping a substantial percentage of the business, stands Jake Burton, whose entrepreneurial portfolio includes both snowboard equipment and clothing companies.

Is your company as active a member of and proponent for the marketplace it serves as Jake Burton is in snowboarding? If not, how could you start to be an authentic player in that community?

For a digital example of the success of a product that started on the fringe and went mainstream, consider Stephen Cakebread who designs games for the Xbox.While the rest of the market was looking for the next Doom, HALO or Project Gotham Racing, he pioneered the online download of small, retro-styled games for consoles. Ironically, his most successful release is Geometry Wars: Retro Evolved, which began while he was working for Bizarre Creations on the hit game Project Gotham Racing. With more than 200,000 trial versions downloaded and 45,000 paid downloads, this is impressive for a game that took one person less than three months to write as a hobby. Although these numbers are dwarfed by the sales of 'on disk' games, including the disk version of Project Gotham Racing, what Cakebread has started with downloadable games for consoles seems to be the next big trend. Downloadable gaming as an idea is not new. Publishers small and large have been developing and distributing small games over the PC for years via services from Yahoo! and Real Networks to great success. But offering downloadable games on a console through things like Xbox Live Arcade is new.

Wired
magazine has reported that from 2004 to 2005, console disk sales in the US dropped by $700 million, according to market research firm NPD Group. Meanwhile, game companies earned $143 million from online console gaming in 2005, a figure JupiterResearch predicts will grow to $2 billion domestically by 2011.

Take this old-is-new-again style of gaming, couple it with the power of new technology to create new results (think back to complexity as a force of change) and you have a new trend starting on the fringe and heading to the mainstream.
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On the topic of console gaming, a really cool innovation from Nintendo has taken the market by storm. While Sony and Microsoft battle it out for supremacy with the hardcore gaming community,Nintendo's Wii is proving to be a huge hit with a target demographic of families and females. If that is not a departure from the gaming crowd, I don't know what is. Most notable is the use of the one-handed controller, about the size of a TV remote, with motion sensors that allow the gamer to use body movements rather than a joystick and half a dozen buttons.

It is so simple that grandparents can do it, and they are. I can't tell you how many of my clients in early 2007 were talking about how fun it was to play Wii over Christmas with their kids and actually be competitive. Some of them I think are even a little addicted. It helps that the Wii landed at half the price of the PlayStation 3, which was released around the same time ('Fast, Good, Cheap – Pick 3').

This 'simple and easy to use' strategy has also fuelled the phenomenal success of Nintendo's hand-held gaming device, the Nintendo DS. The DS has a touch-screen function that allows users to navigate menus with a stylus rather than a key pad. Sales of the DS in 2007 are likely to hit 20 million.

The bottom-line impact is compelling. In the nine months following the release of the Nintendo DS in January 2006 and in anticipation of the release of the Wii, Nintendo's share price jumped 71 per cent. And these investors' hopes have been more than met. The Wii became the fastest selling console in history, selling more than 600,000 in the first eight days following its release.As a comparison, Sony's PS3 sold around 200,000 units.

In the year ending 31 March 2007 Nintendo increased their revenue and profit forecasts three times. In advance of final results for the year, Nintendo said it expected an operating profit of ¥185 billion and net profit of ¥120 billion. Nintendo also said it expected a foreign exchange–related profit of ¥20 billion, rather than its previous forecast of a ¥10 billion loss. Finally, the stock nearly doubled over Nintendo's 2006–07 fiscal year, while the Nikkei remained virtually flat.

In the words of Nintendo themselves the success of the Wii is that it has broad appeal as a 'family-oriented game'. Its success globally was reflected here in Australia with sales of 32,901 units in the first four days, beating the Xbox 360 record of 30,421. In North America, Nintendo expected to sell 4 million Wii units by the end of 2007, compared with 1 million for Sony's PS3.

I have said little of the Xbox 360, also about twice the price of the Wii when it was released, which was sold at a loss for Microsoft in an attempt to 'win the war for the lounge room'. Nintendo's flip – ignoring the conventional wisdom of the gaming crowd – has catapulted it to a market-leading position in less than twelve months. And to think that before the Wii's release, pundits were suggesting it was all over for Nintendo.4 Ask yourself, are you so busy competing on familiar standards and assumptions that you are missing a brand-new market segment as a result? What would happen if you stopped competing in the way you always have and went in a whole new direction? What direction might that be?

OUT ON A LIMB

To be a flipstar, you've got to venture out onto a limb. You can make okay money doing what everyone else is doing, but that's not the way to put a dent in the universe, as Steve Jobs puts it. Although the odds against immediate success may be daunting, the more you are willing to keep trying new things the more the odds change in your favour.

Let's briefly look again at Progressive Car Insurance, which I discussed in chapter 3, 'Superficial is Anything But'. In 1996, Progressive Car Insurance was the thirteenth biggest insurer in the US market on the basis of serving a limited population of high-risk drivers. A change in California state law that limited the insurance premiums Progressive could charge threatened its entire business model. So it found a new one.

Progressive figured out that not all high-risk drivers were the same. The telltale factor was customers' credit ratings. High-risk drivers with good credit ratings were much less likely to have expensive accidents than high-risk drivers with poor credit ratings. Pushing the analysis further, Progressive found that the relationship between a customer's credit rating and the cost of serving that customer held for drivers at all risk levels.

With this customer understanding, Progressive saw that it could shift from offering insurance only to high-risk drivers at high premiums to offering insurance to all drivers at widely varying premiums. The company could become a low-cost provider and undercut every other insurer in the marketplace.

The brilliance of Progressive's play was that it didn't stop its analysis there. Progressive understood that if it gained enough market share, the biggest automotive insurance providers in the US market – State Farm, Allstate and Geico – could easily lower their own rates. In a price war alone, these three had deeper pockets and could beat Progressive at this game.

But remember the need to 'Think AND, Not OR'. Progressive did. Along with offering the lowest prices, Progressive ramped up its claims adjustment service to match the capabilities of the big players and it staked its brand story on being the easiest insurer to do business with as well as being cheap and offering good service. That led to innovations such as offering prospective customers rate quotes from competitors (they became the middleman), even when the competition was offering a lower quote than Progressive itself was, and – in states that allowed it – enabling customers to register their vehicles with the state motor vehicles department from the Progressive website.

Progressive gained immediate traction in the marketplace. Although the top three insurers all emulated Progressive's innovations, Progressive had successfully established its brand story in customers' minds as the insurer that would save them time, money and mental energy. As a result of this gutsy smartthinking flip, Progressive has jumped from thirteenth place to become number three in the US market behind State Farm and Allstate, largely on the strength of its 'easy to use' brand identity, including sending claims adjusters to the accident site or the customer's home or office and writing claims cheques on the spot. From the fringe, Progressive has moved right into the centre of the mass market.
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While on the topic of insurers, how about AAMI here in Australia? While their competition is pushing towards 'efficiency of operation' with push button this and voice recognition that on all of their customer 'help' lines, AAMI refuses to let a machine do the talking. They have real people answering your call, and from my own recent experience they provide one of the friendliest and most helpful services I have ever received anywhere. It was almost a pleasure to have crashed my wife's car and to make a claim.Well, I think I may have overstated that a little, but the experiences I have personally had with AAMI and their customer service have been outstanding. They not only get that business is personal, but they are prepared to stake their competitive advantage in this area even though no one else is. Not only that, but they have been the most competitively priced insurer for the three cars I have insured in the last couple of years.

ING Direct are following a similar path in financial services. Instead of trying to compete with the traditional banks in the traditional way, ING have brought a new banking brand story to Australia and the US by offering savings accounts online at higher rates than those available at your local bricks-and-mortar bank. Appealing especially to younger customers who are comfortable with the internet and love the ease of use of online banking, these accounts give ING a chance to achieve impressive long-term growth by offering new services to these young customers as they progress through the lifecycle, develop in their careers and become more affluent.

The traditional banks eventually wised up and began making similar offerings available. But the advantage in online banking lies with ING Direct, the company that was willing to go out on a limb and be the first to offer the customer a simpler, easier, more rewarding way of doing business. It helped that their product was also fast, good, cheap and
easy!
At the same time, ING never forgot the fundamentals of the consumer financial services market, and made sure that customers associated the company with security and reliability as well as innovation. In this regard it's interesting to see the stumble that Virgin, one of my all-time flipstars, made recently with the Virgin Superannuation Fund. As in most Virgin-branded businesses except the airlines, Virgin itself holds a relatively small stake in the enterprise, which is offered by Virgin Money but is operated by Macquarie Bank's Macquarie Fund Manager.

On the face of it, a Virgin superannuation fund makes great sense as a logical extension of the Virgin credit card and Virgin mortgage services. But there was an embarrassing disconnect between Virgin's hip, edgy, risk-taking brand story, which reflects the persona of Richard Branson himself, and the overwhelmingly 'old' advertising and marketing. Under the Virgin logo, known worldwide for being youthful and cutting edge, there were the same sorts of images of sixty-ish couples walking on the beach as in every other superannuation fund marketing campaign. It was a disconnect both for the young customers using Virgin Money's credit card and mortgage services on their first important purchases, and for baby boomers approaching the end of their working lives and wanting to make sure they had enough money to stroll worryfree on the beach.