by Tiffani Bova
Since its release in 2008, Iron Man has grossed over $585 million, making it one of the highest-grossing films of all time, and since then the Iron Man franchise has grossed close to $2.5 billion in worldwide box-office receipts. Its success set the stage not just for Marvel’s turnaround but its dominance in film over its biggest competitor, DC Comics.
MARVEL UNIVERSE
This could have gone very differently had Marvel not taken such risks and had it not done it in the right combination and sequence—and a bit of good luck, too. The result, adopted from the comic’s print history, was the Marvel Universe. Moviegoers would now see, at the beginning of each film, the Marvel studio logo—an animation showing these historic comic book characters rising from the turning pages into the real world. Then, for the keen-eyed, those films also contained Hitchcock-like cameos by the octogenarian Stan Lee. The same moviegoers could also delight in seeing their favorite Marvel characters appear in other company films.
It wasn’t long before Marvel had developed the practice—first used decades before in the comic books—of introducing new characters in minor roles in one series, then moving them to their own series of films and (if successful) eventually add them to group productions. This mixing and matching enabled Marvel to create an almost infinite combination of stories and characters . . . and if one failed, that character could just be dropped back into the pack to be replaced by another candidate.
Marvel accomplished all of this not by hanging on to its limited product of “comic books” but by pursuing Customer and Product Diversification. It went all in on creating movies and significantly changing its products based on the changing market opportunity (context), rethinking and revamping the combination of its products (less print/more film- famous characters/lesser characters/group films), and then sequencing their appearance and interaction over the course of a decade.
Marvel was back. In August 2009, it was announced that the Walt Disney Company was acquiring Marvel Entertainment for more than $4 billion. In other words, eleven years after declaring bankruptcy, and just nine years after it was at death’s door, Marvel had turned itself into one of the world’s best-known companies—and had more than paid back its investors and entertained its loyal customers as well as captured new ones along the way. Disney’s acquisition of Fox in December 2017 is a portent of things to come for the expanding Marvel Universe—“the once unthinkable acquisition promises to reshape Hollywood and Silicon Valley.”
MARVEL
KEY TAKEAWAYS
Had Marvel shied away from Customer and Product Diversification—after its failed attempts with its push into “Marvel Mania” theme restaurants, Marvel interactive CD-ROMs, and a new trading initiative with SkyBox—the Marvel we know today would not exist. More likely than not, failure will be part of the learning curve you will experience on this path, which is why culture really matters. If you don’t possess the internal fortitude to weather the tough times as you search for new ways to stimulate and drive growth, you are guaranteed to find yourself on a tough road. If you’re not careful, the fear of failure can keep you away from your greatest innovations.
The Partnership path may have been the right choice at the time between Marvel and 20th Century Fox and Sony, but the financial model made it an ill-advised route for Marvel to continue to pursue. You will learn in the Partnership path what to look out for when striking up deals like this.
In the case of Marvel, pursuing the Customer and Product Diversification path was focused on taking an existing “asset” (comic book characters) to a new medium (film), which allowed it to stay close to storytelling and its loyal customer base. The lesson here is, know why customers like your brand, like your products, and are willing to spend money with you. If you ignore those things when deciding where to invest, you will do so at your own risk.
STORY
2
PAYPAL
BANKING ON THE FUTURE
The price of inaction is far greater than the cost of a mistake.
—MEG WHITMAN, CEO of eBay
FOUNDED IN 1998, AROUND THE same time as Netflix—capitalizing on the changing customer and market context—PayPal was one of the more memorable creations of the first era of e-commerce. Founded as the online alternative to traditional money transfers via checks and money orders, the company was perfectly timed for the boom in online retailing and auction sites.
In the years to come, PayPal would also become famous for giving a start to some of the most famous figures of the digital world in the twenty-first century, including financier Peter Thiel, entrepreneur Elon Musk, and venture capitalist Reid Hoffman.
The company took off fast: riding the dot-com bubble, it managed to go public with its first IPO just four years later, in 2002. Later that year, an even bigger e-commerce success story, eBay, and its CEO, Meg Whitman, spotted a chance to supercharge the financial side of its auction service and acquired PayPal for $1.5 billion, taking the company from online auction house to e-commerce powerhouse.
By 2010, PayPal was the acknowledged industry standard for online payments. Revenues approached $3 billion. Total users reached one hundred million in nearly two hundred countries. By 2012, PayPal represented 40 percent of eBay’s revenue (up from 15–20 percent at the time of the deal) and 31 percent of operating profits. Revenue grew at 25 percent annually, operating profits were near 40 percent growth, and free cash flow growth was above 10 percent. The company’s total financial volume was nearly $150 billion.
Yes, these are impressive numbers, of course. But what these numbers don’t tell you is that the context of the market had changed dramatically in the decade since the acquisition in 2002. By 2012, billions of people had access to smartphones, the Internet, and ubiquitous e-commerce and local businesses that had global reach. Buying and selling with “1-Click” (from Amazon) changed the entire dynamic of PayPal’s business. How was it going to capitalize on the next billion people coming online and setting up storefronts, needing to bank and have access to more financial tools?
PayPal might have stayed on their upward trajectory—likely with diminishing returns—had an outside force not intervened and changed everything. In 2013, legendary hedge fund investor Carl Icahn flexed his equity holdings in eBay to demand that the company spin off PayPal. eBay did just that, in July 2015—PayPal was once again independent, although still the preferred payment platform for eBay until that deal ends in 2020 (at which time Dutch fintech company Adyen will become eBay’s primary payments processor. Former eBay CEO John Donahoe became company chairman and Dan Schulman, a veteran of AT&T, Priceline, and American Express, became CEO. Rather than return to the status quo, Schulman saw this moment as a unique opportunity.
The vision of a “new PayPal,” as he formulated it, Schulman admitted, was a “very interesting—and perhaps even a paradoxical—path.” In particular, Schulman had decided that it was time to take PayPal on a new growth path, one that would require PayPal to find relevant gaps—white space—in the market and fill them with new products—Consumer and Product Diversification—that added value: ones they developed in-house, or acquired, or partnered to deliver, especially if they wanted to go after an entirely new market and customer set.
But after all of these years, Schulman believed “the ship had sailed” on the traditional e-commerce transaction business. The U.S. market was saturated, and they needed to look for growth elsewhere.
By 2020, the global payments industry will generate an estimated $2.2 trillion in revenue.
What was it about this Customer and Product Diversification path that was so valuable that PayPal was willing to risk all of its advantages? It wanted to be more than a button on a website, and there was a massive opportunity becoming more apparent with the adoption of smartphones and mobile apps.
My goal is to get us laser-focused on who we are going to serve and who we are going to hyper-ser
ve—and how.
—DAN SCHULMAN, CEO of PayPal
PayPal aspired to be at the center of as many payment transactions as possible, via mobile devices or in a physical retail store. It wanted to develop the right products so consumers and businesses would opt for it no matter the scenario. Schulman knew he needed to be “more than a button on a website”—he needed to evolve its technology to a platform to enable developers (Partnerships) to extend its products and enable its customers (sellers) to have tighter relationships with their customers.
But how was he going to do that? In order to pursue the Customer and Product Diversification path, it first needed to fix some internal organizational issues. The sequence in which these adjustments were made would have material impact on future results. It began when Schulman realized he had to reorganize the company into two groups—merchants and consumers—in order to better align with its target customers. Next, he had to develop a suite of targeted products for both. A new product, Venmo, was developed to serve the millennials market using smartphones and social networks to transfer money, [in 2017 it processed nearly $35 billion]. Next, it acquired Xoom, which gives people the ability to move money internationally via mobile phones [since the acquisition, Xoom’s customer base grew 30 percent and transactions have grown by 50 percent a month]. By diversifying and launching these two new products, it was able to diversify its customer base by attracting millennials. In Q1 2018, PayPal processed approximately $49 billion in mobile payments—a 52 percent growth year over year (YoY). For merchants, it developed Working Capital, which lends money to small businesses that use its service—so far it has lent more than $2 billion.
Successful product launches are the culmination of organizational focus and commitment to product development, creative marketing, smart leadership and, above all else, an in-depth understanding of what drives consumer preferences.
—JOHAN SJÖSTRAND, senior vice president and managing director of Nielsen Innovation in Europe
How did PayPal do with the radically new Customer and Product Diversification strategy? Well, at first, investors were curious but skeptical. While Schulman saw a slowing of PayPal’s revenue streams, the shareholders seemed happier with the status quo. Schulman had to show that PayPal could maintain its current business success—in particular, hang on to all of those point-of-sale customers—even as it transformed itself. Not an easy proposition, especially for a publicly traded company with demanding shareholders.
That’s a big reason why PayPal stock price dropped more than 10 percent in the months following Schulman’s announcement. However, it is good to note that as this is being written, PayPal’s stock is up 50 percent from before it became “The New PayPal.” PayPal added a record 29 million new active users in 2017, to reach 227 million active accounts, including 18 million merchants, and grew its total payment volume by 25 percent, to $99 billion. In the first quarter of 2018, PayPal operates in 202 markets and has added 8.1 million active accounts with net new actives up 35 percent, and $2.2 billion in payment transactions—up 25 percent—with total payment volume of $132 billion. Partners are encouraging their customers to create PayPal digital wallets because it helps them increase their own transactions and increase the quality of the customer experience. Dan Schulman noted: “Our partner relationships in the U.S. and across the globe continue to grow and flourish.”
It won’t be enough for PayPal to rewrite its deeply embedded role as a leader in the finance industry’s larger Web-based information ecosystem as the explosion of mobile commerce makes its way into every corner of the globe. So far, its Customer and Product Diversification strategy move appears to be working.
PAYPAL
KEY TAKEAWAYS
In order to pursue the Customer and Product Diversification path, PayPal was aware of the sequence of decisions and internal changes it needed to make first. Had PayPal not reorganized prior to launching Venmo and Xoom, it may have failed under the weight of internal inertia.
It isn’t possible to put everything else on hold when you decide to make significant adjustments to an organization, products, and customers. Unfortunately, you will be forced to “change the tires on the car as it is going around the track” when you are pursuing growth. This is ambitious and risky for any company and, for a publicly traded company, can alarm investors, which complicates matters even further.
PayPal knew its value and applied that to the changing market context. It wasn’t about where it had been but rather where the market was taking it. It determined what customer segment it wanted to go after (millennials, and the next billion people coming online). As with Customer Base Penetration, if you don’t know who your customers are today as well as who you expect, or want them to be, in the future, it won’t be possible for you to continue to deliver the right products and the right experiences.
STORY
3
LEGO
COMING APART, BRICK BY BRICK
Belief in oneself is one of the most important bricks in building any successful venture.
—LYDIA MARIA CHILD, American writer and activist
AS WAS THE CASE WITH Marvel, LEGO had an extremely valuable product in its bricks, providing the brand a strong and loyal customer base, which, since its founding, had become more popular than any toy in history. At one point it was said that “every second, seven new boxes of LEGO are sold; for every person in the world, there are 62 LEGO pieces; LEGO people—mini-figures, as they’re known—outnumber real people.” Between 1932 and 1998, the company had never made a loss.
Over the years, it diversified “beyond the brick,” and new products were more frequent. However, in its quest to find new growth, it realized that it may have gotten too far away from its core by launching games, clothing, and theme parks. In 1998, LEGO faced its first deficit in its history. In 1999, LEGO decided to cut one thousand jobs. By 2003, net sales fell by 26 percent and play material sales slipped 29 percent. The company was facing its “most serious financial crisis to date” and dealing with a significant shift in market and customer context, including intense price competition and new consumer tastes.
For many, its pursuit of aggressive Customer and Product Diversification moved it away from the original brick into very different products, which was seen as one of the main reasons why LEGO was facing such tough times. Then 2004 came and with that a new CEO, Jørgen Vig Knudstorp, the first non–family member to head the company, and he devised a comprehensive restructuring plan. The idea was to once again have LEGO “become a financially well-founded, value creating business,” one that switched its focus back to its traditional values, culture, and products.
Under his tenure the LEGO Group recovered from a significant growth stall that almost put the company into bankruptcy in the early 2000s. He was able to lead LEGO to a 600 percent increase in turnover from 2001 to 2016 when he became executive chairman. One of the most critical things LEGO did during this time was to get closer to its customers. It began to reimagine the experience children wanted and ultimately expected to have with its toys. You might even say, as LEGO refocused on its core, it also became far more interested in how it could improve the overall Customer Experience. It built labs, crowdsourced products, went “camping” in customers’ homes—all in a quest to learn what it should be developing in the future. LEGO is said to have conducted the largest ethnographic study of children in the world. This ability to stay so close to its customers and stay ahead of their demands is what may have helped fuel its impressive growth over the past decade.
However, in 2017, following a decadelong sales boom, venerable global toy giant LEGO hit a growth stall (again), and it said it could not promise a return to growth in the next two years. This was a jolting acknowledgment for a group widely admired for embracing the digital era, especially with its LEGO Dimensions product and tying up lucrative franchises from Harry Potter to Minecraft.
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sp; What is most surprising about this particular growth stall and why I chose it as a lesson for Growth IQ is the fact that when LEGO ran into trouble back in early 2000, it was growing and growing fast, not just its revenue but its people (headcount), markets, customers, and products. It was pushing into the digital arena, launching movies, and codeveloping games. Although it had a strong Partnership strategy in place to outsource requirements outside its core, allowing it to work with other companies as it focused on what it did best—developing products—it still didn’t allow for enough agility in the business. The organization had become overly complex, inflated, and far too removed from the very customers it sought to serve. As Knudstorp said, “Suddenly the consumer, the shopper, the retailer is a bit too far from the top management.”
In the PayPal story, when Dan Schulman decided to pursue new products and new customers, he began that transformation with a reconfiguration of the organization, including product development and customer segmentation. LEGO followed a similar sequence by tackling complexity in the business to help streamline people and processes. The sequence of changes set them up for a higher likelihood for success.