#277 from Innovative Leader Volume 6, Number 5          May 1997

Component Branding:  Making One Product Indispensable Inside Another
by Thomas Waters Jr.

Mr. Waters  is Safety, Health and Ecology Manager for BASF at their Charlotte, North Carolina Technical Center.

Less than a decade ago, Andrew Grove, chairman of Intel Corporation, was riding high on the success of the newly released 486 chip.  Sales were brisk and a new chip, the Pentium, that was under development, promised to be a blockbuster.

In this wonderful climate, another executive took Grove aside to explain a serious problem.  The new Pentium chip could calculate so fast that the rest of the computer components wouldn’t be able to keep up.  Potential customers would want the enhanced features of the Pentium, but the architecture of current bus (data highway) systems wouldn’t be able to maximize the chip’s benefits.  Intel, Grove was told, would have to design a new bus for computer manufacturers in order for the chip to work as intended.

Grove was furious.  Intel was a chip maker, he insisted, not a bus maker.  The argument reportedly lasted for weeks until he realized that regardless of their current success, the company was to be dominated by its customers.  Advanced Micro Devices and Cyrix made similar chips.  If this bus problem turned out to be true, what would keep computer companies from using chips from Intel’s competitors?  How would Intel keep from losing market share if the industry turned to a different architecture?

It was at this turning point that Grove set a path that was virtually unknown in the computer component business.  It would create demand for its proprietary chips and influence the market for computers over the coming decade.  By designing the bus architecture, it not only maximized the new Intel chip design, but it also eliminated the possibility of using a competitor’s chip.  Maintaining demand for high-margin Intel chips would mean going around overly price-sensitive purchasing agents, and appealing directly to the final consumer.  Thus, end-user demand was born into the component manufacturer mindset.

Component Branding

Grove employed a tactic that I call component branding.  Much like Co-branding, such as attaching the Nutrasweet label to diet cola cans and bottles, it creates added value to a product by focusing on the final product’s competitive advantage on a particular raw ingredient or component; in this case, the chip.  The two products, together, were to be perceived as more valuable than the individual parts.  Both products could stand successfully on their own, but they complement each other in the consumer’s mind so that an extra profit margin can be achieved.

Intel, then made a product, the computer, nothing more than the package that an Intel chip comes in.  Whereas a computer was once a long-term investment.  However, the consumer was now encouraged to buy a new computer every time a new chip was released, so long as it was labeled “Intel Inside.”  Note that Intel never tried to eliminate the computer manufacturer from the equation.  One cannot simply buy the newest Intel chip and install it on your old computer.  Intel made the chip the success factor for computer video and animation, super-speed CD-rom and high-bandwidth modems, creating new demands for an entire computer.

Rather than keep chip characteristics secret, Intel releases many beta test versions so that software manufacturers can write new code to take advantage of the new release.  By the time the chip is released, there are new applications ready to use it, justifying the consumer’s purchase.  Witness the success of the company’s recent Pentium MMX.  While it makes significant improvements for video software designed for MMX technology, the improvement to regular office spreadsheets and word processing are marginal.

What is important is that several software titles were ready for the MMX release, guaranteeing demand for a chip when no clear market existed.  This is a key aspect of component branding:  an unusual lack of market research for the product.  Rather than responding to the market, Intel’s continuous product development creates new demand by developing chips that make computers do things they couldn’t do before, like placing long-distance phone calls over the Internet without long-distance charges.

Your Products

Are there special opportunities for your company to take advantage of component branding?  Chemical intermediates is one such area.  Supplier hopping based on price is common because so many products are commodities with little intrinsic value of their own.  Like computer chips, they must have other components, an architecture, to become a final product for consumer purchase.

Unlike Intel, however, chemical companies have extraordinary problems with customers switching suppliers regularly.  While there’s a lot of talk about it being cheaper to keep a customer than to lure a new one, it is irrelevant if your customer wants to buy solely on price.  Like Intel, chemical companies must advertise inherent benefits of their product line against their competitors, then continue to improve that product in order to keep operating margins high.

One example of successful component branding is DuPont’s Teflon coating.  The “Made with DuPont TEFLON” label is affixed to everything from frying pans to carpet to fashion wear.  Improving the value of the final product by promoting the strengths of a component is a very powerful mechanism to move away from the pricing strategies common in commodity products.

Intel’s marketing serves another function as well.  By improving products and creating near-instant demand, older products aren’t required anymore, so there is little service support needed for them.  Maintaining service departments with trained staff is expensive and turns the company attention from manufacturing to providing technical service.  With demand for the old product falling, however, plant capacity is quickly filled with orders for the newer, higher-margin product as soon as it’s ready for release.  This reduces production-line bottlenecks and reduces inventory costs for older products, the kinds of products the customer no longer wants.

Partnership With the Customer

Another lesson is that there needs to be a partnership—almost a marriage—with the customer.  Whereas most companies simply sell to customers, Intel works along their side.  R&D expenditures on new chip design are sometimes surpassed by market-development budgets for products made in other companies.  Intel has invested huge sums of money into everything from digital cameras to Hollywood productions.  These efforts will probably not be recouped for a number of years.  What these efforts do, however, is guarantee sales and unquestioned market share dominance for the company in the future.  Intel chips will find their way into a multitude of non-computer products that would have been unthinkable just a decade ago.

What does this mean?  It means that development needs to take greater stress in many R&D departments.  It means that R&D staff must look down the road at what will be done with the products they are now designing and building.  It means learning to work more effectively with the marketing department to appreciate not only what value a new product might have, but where that product’s value might best be promoted.

Placing emphasis on product use, rather than product ownership, puts the importance of the product in the purchaser’s hands.  No longer will the manufacturer be required to guarantee the long-term value of a product.  That’s now the purchaser’s responsibility. Which is exactly where it should be.