P65 Innovation Hardball Case Study One

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  • This series of podcasts is inspired by case studies in a book titled Hardball, Are You Planning to Play or Playing to Win?, published by the Harvard Business School Press.
  • These case studies include a mix of innovation, strategy, tactics, and attitude. While I will focus on the innovation part, the other parts are also critical to the success of the examples in the case studies.
  • While some people may react positively or negatively to the word hardball, for the most part I like it. In many podcasts, I’ve told you how difficult it is for innovative ideas to succeed. The biggest challenge I’ve shared with you is that the innovative idea does not have a dramatic enough improvement of a critically important customers benefit. Even if you have this level of difference, execution plays a significant role in your success.
  • The authors articulate five principles that hardball players live by.
    • First, they focus relentlessly on competitive advantage. In many podcasts, I point out the great importance of having competitive advantages in the benefit areas your customers need the most.
    • Second, they strive to convert competitive advantage into decisive advantage. They say, “Decisive advantage is systemically reinforcing. The better you get at it, the harder it is for competitors to compete against it or take it away.” Another way of looking at decisive advantage is that it is a dramatic sustainable advantage.
    • Third, they employ the indirect attack. When a major competitive player first sees your innovative initiative, their first inclination is to ignore it or see it as a small annoyance. Only later did they wake up to find out it’s an attack coming right at them.
    • Fourth, they exploit their employees’ will to win. You have also heard me refer to the importance of company culture – the values and beliefs that drive behaviors. This is about creating a company culture with a competitive spirit dedicated to winning.
    • Fifth, they draw a bright line in the caution zone. The authors say, “before you enter the caution zone, you have to know where the unacceptable area is and draw a bright line for your company that marks the edge, the limit beyond which you will not venture. It is the leader’s responsibility to draw the line and make it very bright and clear.” This guards against the downside risk of some versions of hardball that are win at any cost and a willingness to do anything to win. This version of hardball can lead to wearing pinstripes behind bars.
  • Let’s take a look at this first case study that involves Frito-Lay, a PepsiCo company. I will start with some background on the businesses and the combatants.
  • Historically, Frito-Lay has had about a 60% share or higher of the salty snack category with gross margins of about 50%. As such, it is a very important part of the overall PepsiCo company financial results.
  • Their DSD system – direct store delivered – is a critical part of their overall success. The combination of hiring better qualified people and route and selling efficiency created point-of-purchase competitive advantages and a cost advantage versus the competition.
  • Frito-Lay began to get in trouble in the 1980s when it expanded from purely salty snacks into cookies and crackers. While the delivery truck sizes remained the same, the number of products they needed on the truck increased at the expense of the faster selling salty snacks. Plus their salespeople needed to take care of more shelving sections in different parts of the store. These new products added less than 20% of sales volume but raised costs. In response to the higher costs, salty snack prices were increased.
  • Anheuser-Busch – the Budweiser beer people – also had a strong DSD system. They introduced the Eagle brand of potato chips, corn chips, and pretzels along with their honey roasted peanuts that were national by 1989. Taste tests revealed that consumers thought the Eagle brand of potato chips tasted better than Frito-Lay. By 1991 Eagle had a 6% share of the salty snack market. Feeling confident, Eagle decided to launch products as a direct attack against Frito-Lay’s Dorito product – Frito-Lay’s largest business. Up until then Eagle had focused on big but relatively minor Frito-Lay businesses. Doritos were also the biggest profit center in the salty snack business for Frito-Lay.
  • Roger Enrico took over as CEO of Frito-Lay in 1991. Prior to that he had earned his stripes in the Coke and Pepsi wars where product and distribution hardball had advanced Pepsi to a virtually coequal brand to Coke. He discovered that the primary Frito Lay business measure was profitability and that people were not concerned about losses in market share. From his Coke and Pepsi experience, he knew the critical importance of market share as a critical business barometer. He was very concerned about the market share losses to Eagle. After an assessment, he decided they needed “big changes on big things.” There were four areas that they needed big changes – make quality a reality, take back the streets, find a better way, and win together.
  • He was aware of the taste tests where Frito-Lay lost to Eagle. He went all in with his manufacturing and R&D groups on product quality. It was not easy. He needed to convince them that product quality and taste excellence were to be rigorously developed and evaluated. Regular tastings by senior management and feedback to the manufacturing organization got a lot of people’s attention. Things got more serious when executive tastings rejected a product and ordered the destruction of the already manufactured product – ultimately $30 million of product was destroyed. This is playing hardball with your manufacturing organization.
  • The next objective was to take back the streets, which meant revitalizing their DSD capability. He immediately discontinued the large bags of cookies and crackers while retaining only single serve and reduced the number of SKUs in the Frito lay line by 30%. The net result was increased focus on their very best selling items and a drive to optimize them within the distribution system and at retail.
  • As an aside here, in about this period of time I managed one of the largest Coca-Cola bottlers in the country that Procter & Gamble had purchased. I was faced with the transition from a fairly simple soft drink line to a rapid explosion in the number of SKUs we were expected to have on the DSD trucks. It started with brand expansion – Diet Coke. It then accelerated with type expansion – with lime, Cherry Coke, caffeine free, etc. With the exception of the Diet Coke brand, most of these other types were in the bottom 10% of volume and yet they took up a vastly disproportionate amount of space and sales attention at retail. It was a very challenging time to manage increased sales diversity and to reap increased profitability from the product initiatives. Prior to Enrico’s arrival, Frito-Lay established seven regional marketing operations staffed with marketing people. It had created a complex bureaucracy that had the unintended consequence of stifling efficiency, effectiveness, and innovation. Enrico killed it.
  • He was now ready to go on the attack. I have frequently defined innovation in these podcasts as developing new ideas to make things better. Enrico came up with a two-part innovation plan that was wonderful in its simplicity and focus as well as the achievement of the ultimate objective which was to regain market share and to put that pesky 6% market share competitor – Eagle from Anheuser-Busch—out of business.
  • His first line of attack caught Eagle by surprise – he cut prices. Within three years smaller brands like Granny Goose, Cains, and Borden were out of the business with most of the market share going to Frito-Lay.
  • After an objective evaluation of Eagle, he determined that he could not fight them and beat them on product quality and advertising. While he had revitalized the focus of manufacturing quality, at best they had moved from losing versus Eagle to being in a tie with them. Eagles advertising had been in the marketplace for some time and had established a positive brand image with consumers.
  • He decided on a frontal assault with every asset they had. His target was the profit heart of the Eagle brand which was their sales in supermarkets. He conducted highly motivational sales meetings that tapped into the desire of their DSD sales organization to win and win big. I know personally how this works. Its store to store combat. It’s a day-to-day battle for shelf space and more importantly merchandising and display space within stores. It is only won by a highly motivated and committed sales organization. It takes constant reinforcement, holding people to challenging objectives, and closely monitoring the retail battlefront. Compared to Eagle, Frito-Lay had more people, more motivation, and more support to win the in-store battle.
  • For those listening to this podcast that are not intimately familiar with DSD sales organizations, they have major advantages and capabilities to influence results. Versus non-DSD sales organizations, they have many more people in retail stores for more days per week – the difference between non-DSD and DSD is dramatic. For example, a large grocery store that a Procter & Gamble non-DSD sales representative called on once per week, the DSD sales representatives would call on seven days a week between advanced salespeople and delivery people.
  • By the mid-1990s Frito-Lay had gained back all the share points it had lost. Eagle competitive salty snacks went out of business and Frito-Lay bought four of its factories.
  • This was not giant Frito-Lay against some small company. This was Frito-Lay going up against Eagle – and Anheuser-Busch company. Putting them out of business is the ultimate hardball outcome and Frito-Lay achieved it.
  • Here are a few thoughts from this case study that I think can help most businesses.
    • First, when faced by adversity as Frito-Lay conduct a very thorough evaluation of how your strengths match up with your competitor. In this case Frito-Lay decided it could not compete with product and advertising, but could compete with pricing and their sales organization.
    • Second, price is always a consideration but seldom the best choice when deciding the fight competition. In this case study, a price reduction put three competitors out of business with most of that market share coming to Frito-Lay. In my experience, this is more the exception than the rule. You need to be very careful using price to compete with your competition. Once you take price down, it can be very difficult to bring it back up. Once you take your price down and your competition matches you, they have, at least for the moment, negated any competitive advantage you got by reducing your price. This can turn out to be a lose/lose option – be careful.
    • Third, identify where you have a competitive advantage and then put a turbo booster on that competitive advantage to make it an overwhelming competitive advantage. In effect, this is what Frito-Lay did with their DSD sales organization. They used a very aggressive motivational program, business objectives, and business follow-up to be sure they won in supermarkets, which was the heart of Eagle’s strength. When Frito-Lay demonstrated to Eagle that they were going to defeat them in supermarkets, Eagle made the decision to get out of the business.
  • The hardball part of these lessons is that you need to be coldly objective about your strengths and weaknesses. You then need to take your strengths and go all in.

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