August 13, 2010
From: Andrew Clancy
Senior Editor
Soundview Executive Book Summaries

If you had the opportunity to lead your company through widespread expansion, would you do it? Logic would tell you that growth is always a good idea. What if you had a brand that was considered luxurious and your clientele included the elite of society? Bringing your brand to a mass audience may ruin it in the eyes of more affluent customers. Former USA Today technology columnist Kevin Maney believes that successful products and companies fall into one of two categories: high fidelity or high convenience. In this interview, Maney discusses his book, Trade-Off: Why Some Things Catch On, and Others Don't and why massive growth isn't always the best strategy for every company.

Soundview: You argue that aggressive expansion had a negative impact on Starbucks. Let's be honest. What, if any, advantage was there for CEO Howard Schultz to resist such temptation?

Kevin Maney: There is [an advantage to resisting expansion] and Starbucks is actually a cautionary tale because it had this very high fidelity brand and product that, by driving it to such ubiquity, it basically tarnished the brand. By opening so many stores so fast, it had baristas who were not trained properly. It had tried to put in automated coffee machines that made coffee that wasn't as good. The customers noticed and they started to turn away and you saw Starbucks stock just plummet starting in 2007.

If you're a high fidelity company, that means essentially speaking, you're a low-volume, high-margin company and the pressure on you as a manager is always going to be to grow, to grow volume, keep the margins high. Of course you want to do that. That's part of what you do when you're running a company, but the wise CEOs out there cherish that brand, that image, that fidelity and make sure that whatever growth happens, happens while maintaining that fidelity and not overdoing it. There's a delicate balance.

Similarly, if you're a super high convenience company or have a super high convenience product or service, you are by definition a high volume, mass-market, low-margin type of business. If you're the CEO here, the pressure on you is to raise margins. Keep that mass market and raise margins. Again, you want to do that while maintaining that convenience edge and not, for instance, introduce higher priced products or brands that are going to make people think twice about whether you're the one they want to be spending their time and money on.

Soundview: Kodak was a company that ignored the warning signs of the fidelity belly. What advice can you offer to executives about recognizing the warning signs if the company looks like it might slide into the fidelity belly?

Maney: There's a book that does a great job of describing the dynamic that happened with Kodak and that's The Innovator's Dilemma by Clayton M. Christensen. It's very true that with Kodak or newspapers or any of these other companies that have this happen to them, they actually see the warning signs. They know [the shift in] technology is happening. They see it, but their businesses are built on these older technologies and the models that surround them and it's just so difficult to break away from that and it's a traumatic transition.

So Kodak had this gigantic business built on making film. It saw the digital cameras coming and it knew what was going to happen and yet it could not make the transition. It could not close all those factories. It could not take the hit on all those profit margins that it got from making film and reconstitute the business around this whole new idea of digital cameras and digital technology. It happens time and again. The current Kodak CEO, Antonio Perez, came in and basically said, you've got to burn the platform you're standing on, just torch it, and that's the only way you're going to fully embrace a new way of doing business. That's tough too. Kodak has had a hard time with that transition, even though they're certainly doing better than they had in years past. It's a tough, tough thing for an old business, in an old industry that's been around for a long, long time. These transitions are really, really difficult no matter what you do.

Check out the summary of Trade-Off: Why Some Things Catch On, and Others Don't by Kevin Maney, now available from Soundview Executive Book Summaries.