When you're hot you're hot - when you're not you're not -- Starbucks & Dell

With all due respect to the great guitar playing songwriter Jerry Reed, today Starbucks and Dell continue to look like copies that were once hot - but now couldn't warm a nose in a blizzard.

"Starbucks continues food push with overhauled menu items" is the Advertising Age headline.  Starbucks closed hundreds of stores last year, saw sales in stores open a year fall 8%, and profits dropped 77%.  But they aren't bringing anything new to their business.  They are revamping the food to make it more healthy.  There's nothing wrong with introducing healthier food, but how does Chairman Schultze think this will turn around Starbucks?  The company's "return to basics" program has made it overly sensitive to retail coffee prices, while robbing the company of its highly desired cache.  An enhanced instant coffee did nothing for revenues.  And now this overhauled menu doesn't really offer anything new to excite customers.  It's still a ton of calories - even if they are healthy calories - offered at a high price.

Starbucks has given rejuvenated life to McDonald's.  Nobody expected the McCafe to be a huge success.  But Starbucks has played right into McDonald's sites by shutting down most of its "non coffee" operations and repositioning itself not as a destination but as a fast food outlet.  McDonald's reminds me of the hunter who spends all day tramping the forest in search of a deer, only to get back to his pick-up and have a big buck walk within 20 yards of his vehicle.  When he least expected to get his kill, it walked up on him.  And that's what Starbucks has done.  It's made McCafe much more viable than it appeared likely, simply because Starbucks chose to move into direct competition with McDonald's rather than continue on the new business programs it created earlier in the decade. 

Starbucks has gifted McDonald's by choosing to fight them head-on right at McDonald's strengths - operational consistency and low price.  And now Starbucks is showing complete foolishness by entering into traditional advertising - an area where McDonald's is a powerhouse (the inventor of Ronald McDonald is an expert at ad content and spending).  Even worse, Starbucks, which eschewed advertising for years, has decided to promote its new food menu by placing ads in (drumroll please) newspapers!  At a time when readership is dropping like a stone, and during summer months when seasonal readership is lowest, Starbucks is choosing to promote with the least effective ad medium available today.  Even billboards would be a better choice!  We have to ask, wouldn't the previous, much savvier, leadership have launched a wickedly intensive web marketing program to lure customers back into the stores?  Some viral videos, lots of social media chat - that sort of thing which appeals to their target buyer?  Why would anyone choose to fight a giant - like McD's - on their court, using their rules, against their resource strength?  That's not savvy competition, it's suicide.

Simultaneously the once high-flying Dell has been in the doldrums for several years.  Decades ago Dell built a Success Formula that ignored product developed, placing its energy into supply chain advantages.  Competitors have matched those operational advances, and now Dell gives consumers little reason to make you prefer their product.  Not to mention forays into service cost reductions like offshore customer support that absolutely turned off customers and sent them back into retail stores.

Now "Dell is working on a pocket web gadget" according to the Wall Street Journal headline.  Not a phone, not a netbook, not a laptop the new device is an assemblage of acquired technology into a handheld internet device.  How it will be used, and why, is completely unclear.  That it will give you internet access seems to be the big selling point - but when you can accomplish that with your iPhone or Pre, or netbook should you choose a larger format, why would anyone want this device?

Dell seems to forget that it has to compete if it wants to succeed.  It's products have to offer customers something new, something better.  That's what made the iPHone so successful - it gave users a lot more than a traditional phone.  And the same is true for Pre.  And these devices now have dozens and dozens of applications available - everything from playing video games to ordering pizza at the closest delivery joint to reading MRI screens (if you happen to be a neurologist).  Yet, this new Dell device has no new apps, and it's unclear it is in any way superior to your phone or netbook.  Dell keeps trying to think it has distribution superiority, and thus can sell anything by forcing it upon customers.  Even products that have no clear application.  Dell is Locked-in to its old Success Formula, all about operational excellence, but that model has no advantage now that people with new technology - superior technology - can match their operational excellence.

When companies remain Locked-in too long they become obsolete.  And it can happen surprisingly fast.  Every reader of this blog can remember when Starbucks seemed invincible.  And when Dell was the information technology darling.  But both companies remain stuck trying to Defend & Extend their Success Formulas after the market has shifted - and their results are most likely going to end up similar to GM.

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Comments

[drendall]

Amen! I loved it when you wrote "Starbucks has gifted McDonald's by choosing to fight them head-on right at McDonald's strengths - operational consistency and low price." McDonald's is strong where Starbucks is weak (consistency, low price). However, Starbucks WAS also strong where McDonald's was weak (service, customer experience, status, etc.). Instead of continuing to do what they do well, and ignoring what they do poorly, Starbucks tried to fix their weaknesses, become well-rounded, and act more like McDonald's. As you point out, this did not lead to success. Instead, they are now playing a game that McDonald's can dominate.

[Adam Hartung]

Great comment drendall. Too many leaders let themselves get sucked into going toe-to-toe with competitors, when it's better to compete against their weaknesses rather than their strengths. Upending competitors is done by competing in areas where their Lock-ins won't let them go. Starbucks had it right, with hand made drinks and stores that were all unique - growing hand-over-fist against McDonald's that was stuck in its rut. But now...