#277 from Innovative
Leader Volume 6, Number 5
Branding: Making One
Product Indispensable Inside Another
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.
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
Grove employed a
tactic that I call component
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.
Are there special
opportunities for your company to take advantage of component
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.
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
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.
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.
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
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.
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.