Seeing Around Corners

by Rita McGrath

  So far, so good. Well, along comes the cell phone revolution of 2007 (with the introduction of the iPhone and the commercialization of Android), and the order of jobs to be done by household budgeters changes dramatically. By then, social media was firmly established, and the desire to be connected was well entrenched, giving teens not only a reason to want to connect but also the technology with which to do so. The job of being connected has displaced—to some extent—the job of buying clothing. Not that clothing isn’t still being purchased, but if you were to think of jobs to be done in a hierarchy, the job of connection has significantly increased in importance.

  Since that has happened, the resources that would have gone into the purchase of apparel perhaps are now being redirected. That in turn means that an entirely different consumption chain has become more relevant to buyers—which has then shifted the attributes they are anxious to obtain, which implies that the capabilities assembled to deliver traditional retail offerings are less relevant as well. The inflection point is rippling through the arena.

  Anticipating a Change in the Arena

  This is all very well in retrospect, but the question is, how might we have anticipated the coming inflection point?

  As I have said, an arena is primed for an inflection when some kind of change takes place that shifts one of the key metrics important to an established business or creates a new category with entirely different key metrics.

  Let’s consider the case of American teenagers. In 2007, the year of the iPhone’s introduction, market researchers found that teens themselves had spending power that amounted to about $80 billion, and that their parents kicked in another $110 billion for other items, including food, entertainment, clothing, and personal care. If that is the critical resource your organization depends on, you’d probably like to start understanding where such spending is likely to shift.

  Among the key metrics retailers traditionally obsessed over for this population was the all-important “back to school” season. As one observer remarked, “The business models that stores were built on—and on which retail businesses still largely depend—were rooted in those key periods of profitable performance.” And the assumptions that many retailers made were deeply embedded in traditional metrics, such as sales per square foot and same-store sales compared across time periods. Most retailers, glued to traditional metrics like those, would not even have seen the impending threats emerging from the Internet.

  Had they been paying attention, however, back in 2007 researchers were already commenting that the Internet—and, more specifically, social media—had dramatically affected how teens were spending their time. Teens, they found, were transferring the kinds of friendship behavior that age group had engaged in forever (talking on the home phone, hanging out) to social websites and the Internet. A Washington Post story about teen shopping habits found that even then, and even when teens were shopping in a brick-and-mortar store, cell phones were frequently utilized to check in with friends or get approval on a purchase. One of the teens in the Post story described the job clothing did for her back then as introducing her to people around her. “I want them to know a little bit of who I am,” she said. “And I’m proud of it.” Eerily, the job that clothing was supposed to do for her then is today easily supplanted by technology.

  By 2014, the weak signals that teenagers’ relationship to clothing and their clothing purchasing experience was undergoing dramatic change were no longer weak. In fact, by the time of the Wall Street Journal’s analysis, it was pretty obvious that a major inflection had arrived. A 2014 New York Times article titled “More Plugged-In Than Preppy” describes attitudes that would strike fear into any teen-oriented retailer’s heart.

  “Clothes aren’t as important to me,” said Olivia D’Amico, a 16-year-old from New York, as she shopped at Hollister with her sister and a friend. “Half the time I don’t really buy any brands. I just bought a pair of fake Doc Martens because I don’t really care.” She probably spends more on technology because she likes to “stay connected,” she said.

  One frustrated retail analyst explained trying to get a conversation going with his teen audience about upcoming fashion trends. “You try to get them talking about what’s the next look, what they’re excited about purchasing in apparel, and the conversation always circles back to the iPhone 6. You get them talking about crop tops, you get a nice little debate about high-waist going, but the conversation keeps shifting back.”

  A surprise for researchers trying to understand teen spending patterns was an increase in the amount of money teens spend on food, again relative to apparel. It turns out that food (for example, at McDonald’s) is merely purchased so that teenagers can access restaurants’ free Wi-Fi systems (again, via their phones).

  Perhaps most important from the point of view of a retailer selling to teens is what all that communicating is about. It turns out that platforms such as Instagram, Facebook, and even Twitter and its ilk are where teens post photos. And to be seen wearing the same clothing in picture after picture? Well, that’s really lame.

  This trend is even having an effect on such fashion events as fashion week and the traditional fashion show. With styles on the runway broadcast to a worldwide audience, potential purchasers find the looks “dated” by the time the clothes are actually available in stores. The name for this? “Product fatigue.” Here’s what it feels like:

  Ken Downing, the fashion director of Neiman Marcus, said recently that he was showing a client a hot-off-the-delivery-van $11,000 embroidered jacket, only to have her wrinkle her nose and say, “But don’t you have anything new?” “It arrived the day before,” he observed. But it had been online since last October.

  So let’s understand the impact of these interrelated developments on key metrics for retailers of teen merchandise. First, we have an increasingly mature e-business ecosystem in which potential customers expect to be able to buy just about anything they want not only online but on their phones. They also expect a consistent experience with brands whether online or in person. Second, we have devices that are now widespread enough that the majority of customers in the target audience have access to them. Third, with the rise of social media, there is an increased emphasis on cultivating an online presence, which makes too many repeat outfits less desirable than perhaps they previously were. In sum, the inflection point looks like very bad news for traditional retailers.

  Thriving in Light of an Inflection Point

  As with all inflection points, those who are well positioned to pass through the inflection in teen apparel could enjoy significant benefits. Inditex, the parent company of Zara and other brands, essentially invented fast fashion. Its business model presents massive challenges to the conventional assumptions in clothing retailing. Instead of designing clothing for seasons, Zara seeks to make creating and distributing designs an ongoing and continuous process deeply informed by customer inputs. Instead of spending a lot of money on advertising, Inditex spends on real estate—seeking to occupy sites on the same blocks with the much more expensive designer brands. And rather than hiring expensive designers, Zara more or less politely copies them, using its deep connection to customers to suggest alterations.

  As early as 2015, analysts noted that purveyors of fast fashion were enjoying torrid growth, despite the doldrums of the conventional apparel industry.

  Companies such as Inditex, H&M, and a more recent entry, Forever 21, thrived as traditional buying seasons disappeared, customary prediction and stocking practices were overturned, and customers became omnichannel consumers of all kinds of goods. Relatedly, shoe seller Zappos enjoyed remarkable growth throughout the first decade of the century, reaching $1 billion in revenue and being acquired by Amazon in 2009 for $1.2 billion. During the first two quarters of 2017, Amazon’s growth in shoe sales outpaced the total US growth in 2016.

  New key metrics, such as dollars acquired per customer, are likely to be important in this changed environment.

  And,
in another development sure to give even Zara pause, startups such as ASOS, Boohoo, and Missguided are making fashion even faster. They connect to customers via social media to pick up on new trends and use local sourcing to make clothes available within days or even hours.

  An Energy Major Pursues a New Arena

  Arena-based analysis can also apply to nonconsumer businesses. Statoil, Norway’s government majority-owned oil and gas company, has been engaged in a major transformation to become something entirely different while also retaining its presence in the energy arena. The inflection point it is traversing includes the movement toward a low-carbon future—characterized by more-distributed energy systems and a general interest in greener sources—while still recognizing that the human population is likely to require more, not less, energy going forward. The transformation is so radical that the company even changed its name—it is now Equinor—completely dropping the “oil” designation, which had turned into a burden.

  According to one news article, “The oil and gas company said the name change was a natural step after it decided last year to become a ‘broad energy’ firm, investing up to 15–20 percent of annual capital expenditure in ‘new energy solutions’ by 2030, mostly in offshore wind.”

  The article notes that in 2013, the company was ranked as the most desirable place to work among Norwegian students, based on a survey conducted by the Norwegian firm Evidente, using the website KarriereStart.no. By 2018, it had dropped to fifteenth place, signaling unease among young people about the company’s contribution to climate change and a desire to turn away from fossil fuels altogether.

  Key Takeaways

  Consider whether the assumptions you are making about your business might need a fresh look. Review the warning signs of fading advantage.

  Start defining your arena by asking which pool of resources—typically revenues—your business currently relies on. What other players might be trying to grab those same resources, even if they don’t make or offer products and services similar to yours?

  What are the key jobs your customers are trying to get done that influence spending decisions?

  What is the consumption chain your customers go through to get a job done? Does it involve spending on something you could sell them? Are there any places where the chain breaks down?

  What about doing business with you do customers see as positive (they would buy more or be more loyal because of these features)? What do they see as negative?

  Finally, how might the configuration of these things change given shifts in the environment and new possibilities? Are there issues you need to begin preparing for now?

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  Customers, Not Hostages

  In Wyoming with 10 investors at a ranch/retreat, I think I might need a food taster. I can hardly blame them.

  —Reed Hastings, CEO of Netflix, 2011

  Reed Hastings, the founder of Netflix, was late in returning a videocassette of the movie Apollo 13 to his local Blockbuster video rental store, and was furious at being charged a significant late fee. He went looking for a better way to get movies to watch at home.

  That is indeed a great story about how Netflix started. Regardless of whether it is true or not, the inflection point that created the opportunity for the company that became Netflix was the original commercialization of the DVD. DVDs were not only digital but also less expensive to manufacture than videocassettes, with the result being that movie studios offered them for sale (rather than their being rented) as a retail product.

  Videocassettes were large and heavy. DVDs were light enough to mail in a greeting card envelope, which was the first proof of concept that Hastings and his cofounder, Marc Randolph, conducted. With the ambition of becoming the “Amazon of something,” as one observer noted, they launched their company in 1997 and ignited a revolution in how people all over the world would consume content.

  It is worth mentioning at this juncture that Hastings, like many who have seen pending inflection points coming, had a technological/scientific background. With a degree in computer science from Stanford and the founding of his first company, Pure Software, in 1991, he was keenly aware of what digital technologies were capable of and where they were going. In August of 1996, Pure Software merged with Atria to form Pure Atria. One year later, in August of 1997, Rational Software acquired Pure Atria, freeing Hastings up to launch Netflix.

  Hastings foresaw the advent of the streaming model early. What he didn’t expect was how long it would take consumers to adopt it. As he put it, “In 1997, we said that 50% of the business would be from streaming by 2002. It was zero. In 2002, we said that 50% of the business would be from streaming by 2007. It was zero . . . Now streaming has exploded . . . We were waiting for all these years. Then we were in the right place at the right time.”

  The Journey Toward Streaming

  The idea for what would eventually become digital streaming, or video on demand, had its roots in the humble VHS, or Video Home System, developed by the Victor Company of Japan and commercialized in the late 1970s. It was introduced in the United States in 1977 (ending the prospects of an earlier videocassette technology invented by Philips), and immediately ignited a tug-of-war between content providers and their viewers. Content providers wanted customers to be hostages to their preferred way of doing things; viewers wanted to be free of those constraints.

  Content providers wanted to tightly control when certain shows were on, show advertisements during them, and manage the cost of the content. Viewers, on the other hand, preferred to take control of when they could watch shows and potentially skip over annoying commercials. “Watch Whatever Whenever” was the rallying cry for one of Sony’s early models.

  The television people were not amused. In a 1976 case that eventually went all the way to the US Supreme Court, they lost their argument that because VHS recording devices could lead to copyright infringement, they should be illegal. The Court, in a ruling that seems almost quaint by today’s standards, disagreed. It decided that as long as a product had substantial legitimate uses for which it could be sold, it could legally be offered, even if some users committed crimes while using it. By then, the idea that people could exert control over when they looked at content was firmly entrenched.

  Cassette tapes as content repositories, however, had a lot of drawbacks. You had to rewind them to replay them. Returning to a given spot (for instance, if you wanted to pinpoint a particular section of an exercise tape) required carefully monitoring the tape machine’s counter. This spurred inventors to see if there might not be another format that would be more convenient. One of the first attempts was the LaserDisc, an expensive vinyl-record-size storage medium that also required an expensive player and couldn’t record—it could only play back content that was prerecorded. Clunky and incomplete (you had to flip it over mid-movie to watch the whole thing!), it never took off in the United States. (Although my parents, early adopters, were distraught when the format came to its last gasp.)

  A breakthrough came along with the digitization of content. Digital DVDs as we know them were introduced in 1997, providing the inspiration for Hastings. The ill-fated peer-to-peer file-sharing network Napster further showed the power of being able to share digital content (albeit illegally, as it turned out) in 1999, providing evidence both of the ability of the technology to support this capability and of user demand for digital content. Moreover, pirates began to share video content illegally, forcing the hands of content producers who might have preferred to stick with the old system. It became common knowledge that streaming video content—in other words, video on demand—was likely to take hold as a popular medium.

  Indeed, a Harvard Business School case study on Netflix in 2000 included this passage for students to ponder:

  With the widespread adoption of the internet, analysts believed that home video would eventually be delivered directly to consumers over high-speed internet connections. The eventual advent of video-on-demand meant that
video retailers had a limited time frame in which to position themselves for this new environment. Although it was generally agreed that such a change would take place, there was less agreement on the length of time it would take.

  Blockbuster Blows It in Streaming

  In a classic example of moving too early on a potential inflection point, Blockbuster took this streaming idea seriously and, in the year 2000, went into partnership with Enron (yes, that Enron) to explore the potential of streaming video. Enron Broadband Services (EBS) was a particularly innovative young organization. One observer noted that EBS “was not the inventor of concepts such as cloud computing, services embedded in the network, and apps on demand — however, by the time EBS began talking with Blockbuster in 1999, EBS already had working versions of those technologies, in use with customers, long before these now-dominant technologies were in wide commercial use by other firms.”

  While EBS was remarkably successful at building out a working video on demand platform, the venture stalled as complex negotiations with movie studios over content took place. At the time, there were no conventions for how revenue from streaming services would be divided (a dilemma that has still not been resolved). The Blockbuster people, who would have had far more clout with the studios, weren’t particularly keen on the streaming idea, and the pricing strategies required to cut the deals meant that the movies that were available were expensive. Even more, given the state of broadband at the time, downloads still took a while, and you couldn’t watch these movies on a television without buying a special adapter. The venture failed, the parties blamed each other, and both companies ended up in bankruptcy—albeit for very different reasons.