Of the many contributions Jack Welch has made to business wisdom, one of his most famous was “Be #1 or #2 in every market.” That advice served GE well in shaping its portfolio of businesses and its strategy for many years, but it’s not clear to us that it is as relevant any more. It may, in fact, be a dangerous strategy in today’s business environment.
Take the cereal business, for example. General Mills actually grew from #2 to #1 in market share the last few years. But the cereal category declined $4 billion dollars from 2000 to 2015, so it didn’t matter. In fact, total sales at General Mills has declined for 15 of the last 16 quarters.
General Mills highlights three things that are the root of the problem of the axiom “Be #1 or #2 in your category.”
The first problem is it encourages managers to focus most of their attention on market share and not enough on the category itself. It assumes your category will continue to be relevant and grow so you can be a big fish in a big and growing pond. But what happens when your category is not growing — or even declines? Being number one in a declining market isn’t a great place to be.
Will cereal go to zero? Probably not, but the decade-long U.S. decline of ready to eat cereal will likely continue. Few companies are willing to consider that its category’s best days are behind it and lay out a radically different strategy to win in the midst of category decline or exit the category entirely. Category growth and decline trends don’t shift on a dime and can take decades to play themselves out. Categories grow when they go from niche (e.g., some people use it some of the time) to mass (e.g., many people use it much of the time). Similarly, categories decline when categories hit their peak and are replaced by better, more innovative categories. Like how the growth of and innovation in food service may eventually turn cooking into a niche hobby like sewing.
The second problem is that the definition of a “category” is often inaccurately defined, which creates blind spots from unexpected competitors. Most companies think of their category from a manufacturing lens. Let’s keep our focus on cereal as the example.
The truth is the category is much more accurately defined through the eyes of the consumer. Their category is really “ready to eat cereal (what) eaten for breakfast and snacks (when) by sugar and carb loving consumers (who) sold by huge brands in the middle of huge stores (how).” That’s a mouthful that no Nielsen or Euromonitor data will truly reflect, but that’s closer to the truth and better prepares you to compete.
General Mills doesn’t compete with just Kellogg’s cereal (what), but a growing number of breakfast and snack categories (when), with a shrinking consumer base in the face of anti-sugar and anti-carb trends (who) and smaller brands, sold in smaller format stores and e-commerce (how). Looking at it this way, and you see a seemingly endless array of Russian nesting dolls hidden competitor one after another. Carbs are losing to protein. Meals like breakfast are giving way to snacks. Big brands are giving way to smaller brands. Grocery is giving way to food service and e-commerce.
The third problem is that few companies actually have a category strategy. They have pricing, product, brand, portfolio and corporate strategies. But very few actually give real thought to how to grow the category in a holistic manner of breakthrough product innovation and breakthrough business model innovation.
The first step in strategy has to be to assess whether the category is growing or declining, then choose your strategy tool kit accordingly. Most traditional strategy axioms like “create a competitive moat,” “the low-cost producer wins,” “execution trumps strategy,” and “the customer is always right” makes sense when your category has a tailwind you can count on.
But if your category is declining or about to decline, your moat, your leadership in cost, and your execution will all look silly at best and could be a big write-down at worst. As Peter Drucker said: “There is nothing so useless as doing efficiently that which should not be done at all.” And in a declining category, you should still treat all customers with empathy and respect, but you shouldn’t be listening to most of them. If superconsumers are 10% of consumers that drive 30-70% of category sales and 99% of category insights and wisdom, then 90% of consumers may in fact be misleading you.
It’s easy to forget that a little over six years ago, in 2011, Netflix’s market capitalization fell from $15 billion to under $4 billion thanks to the Qwikster and pricing debacle. They opted not to build a moat around their #1 mail order DVDs business; instead, they shifted to a far more expensive original content strategy, and then they completely botched the execution of their pricing strategy and angered many of their customers. And yet, it was prudent to be bullish on their prospects given they shifted aggressively from a category that was dying to a category that was growing. Today their market capitalization is over $90 billion.
Companies like General Mills have three choices. You can exit and enter a better category via a merger or acquistion. You can re-invent the category through category creation and category design strategies. Or you have to change your stripes, and radically shift your business model. It is still possible to win in a declining category. But you likely need to trade out your mass-marketing business model for a niche, premium, and specialty model and scale strategies for a superconsumer strategy.
Is it likely that General Mills would sell or spin off cereal? Can they re-invent and create a new category? Can they shift from mass marketing to super-premium, direct to consumer strategies? It’s unclear. It is very hard for large companies to change. These are the questions that their leadership and board just be wrestling with.
But all three strategies have higher odds of success than trying to do the same mass marketing model in a declining category. One of us (Eddie) grew up in Hawaii and spent a lot of time in the ocean, so we know that if you try to swim against the ocean current, no matter how good a swimmer you are, the ocean always wins.
Eddie Yoon is the founder of Eddie Would Grow, a think tank and advisory firm on growth strategy and a director at The Cambridge Group. His book, Superconsumers, was published by HBR Press in December 2016. Follow him on Twitter @eddiewouldgrow.
Parker DeRensis is a MBA candidate at The University of Chicago Booth School of Business. Previously he was a consultant at The Cambridge Group, where he worked on growth and pricing strategies.
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