What do Walmart, The Gap, Lego and IBM all have in Common?
Successful strategies ensure that companies will eventually outgrow their target customers. Competition, innovation, and demographics ensure the opposite: that target customers will outgrow the companies with whom they have traditionally done business. Both scenarios create existential threats for companies and their strategies. For a time, a company can “stretch” its exiting strategies in ways that may open the door to new buyers, but most strategies should be replaced rather than stretched. A gallon of milk, organic or not, has a limited shelf-life.
Let’s consider these companies: Walmart, The Gap, Lego, and IBM. Walmart’s strategy over the last five decades has been to develop massive, full-line discount stores across the United States. Today, the company has few places left to build, leaving Walmart nearing the limits of its target market. And in fact, Walmart’s growth slowed in 2016 for the first time in the last decade!
To stimulate renewed growing, Walmart needs new markets to conquer. To do this, Walmart has been attempting to expand its product mix, and it may deepen the level of services it makes available to its existing markets. But using this approach to stimulating growth over the long term is easier said than done. And Walmart almost certainly knows this.
As a result, early this year, Walmart announced that it was shuttering its small-store format called Walmart Express. Its Express strategy was an attempt to grow in urban areas where the company had little market penetration, and to cost-effectively develop a presence in towns too small for a Walmart superstore.
Consider Gap Inc. It created Old Navy in the mid-1990s when its namesake business was nearing the saturation point with its target market for non-trendy, classic, moderately priced clothing. Twenty years later, Old Navy is the main bread winner for Gap Inc. selling trendy clothing at a low price point and with fewer frills in a lower-cost store design. Their strategy was to capitalize on a value proposition designed to attract a different target customer while leveraging the same design, manufacturers, inventory systems and supply chain capabilities that distinguished the original business.
If we contrast Walmart’s Express and Gap’s Old Navy strategies, we find some interesting observations. Walmart’s Express required new capabilities in its inventory and supply chain management that involved smaller, more frequent direct-to-store delivery drops. It was also predicated on a financial model that was low-volume and high-margin, the opposite of their large stores. Walmart has enjoyed a value proposition based on one-stop-shopping in locations where fewer options existed. Their Express strategy was based on locational convenience, which immediately began to compete with the Kroger’s, Trader Joe’s, etc.
Next, let’s look at Lego. The company’s primary building block (pun intended) of the company’s strategy was to capture the imagination of kids and make it possible for them to make things with Lego’s colorful plastic bricks. Unfortunately, Legos lost its cool factor with children at an increasingly earlier age in part due to the explosion of video gaming in the early 2000’s, thus shrinking its target market. Lego almost went bankrupt in 2004.
IBM faced bankruptcy in the early 1990’s with calls to dismantle itself after its entry into the PC business failed to offset waning demand for its mainframe computers. The invention and rapid commercialization of midsize computers and servers with dumb terminals made corporate IT departments think differently about their computing needs. In other words, for Lego and IBM, instead of outgrowing their target customer, their target customer was outgrowing them. Either way, these situations created tough growth strategy problems. To return to growth, each had to develop a strategy that would revitalize its relevance and distinctiveness with target customers. This was challenging but possible.
Another example, MTV, the cable channel owned by Viacom, launched in 1981, bringing televised music videos into the homes of teenagers hungry for this medium, myself included. But then we teenagers grew into adults, and the teenagers that replaced us found new, preferred ways of consuming their music: through CDs, MP3 players, and eventually the streaming Internet. As a result, MTV faced terminal decline until it changed strategies and moved to reality and scripted TV shows geared specifically to teens and newly minted adults.
Similarly, when Lego brought in new leadership in 2004, it’s new strategies allowed them to enter areas such amusement parks, education, virtual model construction, and movies. Taking an approach from Disney’s playbook, Lego specifically wanted to increase the engagement of children (and parents) with Lego building blocks. Lego went from near-bankruptcy to becoming one of the top five largest toy companies in the world.
Like Lego and MTV, IBM’s renewed success was achieved by revitalizing its appeal with its current customers. Instead of breaking itself up, IBM’s board brought in a new chief executive, Lou Gerstner, who promptly reinvented the company’s value proposition from providing a product (mainframe computers) to providing a solution (integrating hardware, software, and business processes). The company regained its status as an essential partner to the world’s largest and most important enterprises.
The critical take-away here is this: When you’ve outgrown your target customer, you may be tempted to try to stretch every element of your strategy – your target market, value proposition, distribution channels, and frankly, the entire ecosystem through which you produce and distribute. The challenge is doing this in a strategic and coherent way. It you can successfully do this, like the Gap did, great. Otherwise, like IBM, you may have to chuck the old strategy entirely and develop a totally new approach. Yes, every strategy, like milk, really does have a shelf life.