See attachment
Discussion Board # 1
Recall "MiniCase 5: Business Model Innovation: How Dollar Shave Club Disrupted Gillette." The Dollar Shave Club disrupted the market with its model. Think of a product you have used or are currently using that demonstrates this disruption in the market and explain why it is a disruptor. In your response(s) to your classmates, comment on how the impact of your chosen product is different or similar to the effect of their product.
Reading:
ALTHOUGH MOST OF our attention is captured by fancy high-tech innovations such as the iPhone or Tesla’s sleek electric vehicles, innovations do not need to be high-tech or radical to be successful. Until recently, Gillette, a company that invented the safety razor and the razor–razor-blade business model, dominated the $3 billion U.S. market for wet shaving with some 75 percent market share. Yet Dollar Shave Club, a young, fledgling startup with an initial budget of $8,000, disrupted the powerful Gillette with a low-tech innovation and is gaining market share rapidly. How can the powerful Gillette, a unit of Procter & Gamble with annual revenues of $67 billion, be beaten by a brash startup? Gillette’s pattern of incremental innovation over time led to overshooting in the market, resulting in a product that was overengineered and too expensive. King Gillette invented the safety razor about 115
years ago. The company also came up with the highly profitable business model of selling the razor for a low price and charging a premium for replacement razor blades. This business model is now widely adopted (think printers and cartridges, for example), and is called the razor–razor-blade business model commem-orating its origins. When introduced, the new safety razor was a radical innovation, allowing Gillette a tem-porary competitive advantage. To sustain this advan-tage over time, Gillette followed up with incremental innovations, mainly by adding additional razor blades to the razor, all the way from one blade to six. As a re-sult of this innovation pattern over time, one of Gil-lette’s newest razors, the Fusion ProGlide with Flexball technology, a razor handle that features a swiveling ball hinge, costs $11.49 (and $12.59 for a battery-operated. This created a situation where Gillette exposed itself
to low-cost disruption. One key is that the high-end, highly priced offering of the market leader is not only overshooting what the market demands, but also often priced too high. One wonders if a person really does need six blades on one razor, or wants to pay over $10 for one cartridge. Seeing this opening provided by Gillette’s focus on
the high-end, high-margin business of the market, Dollar Shave Club established a low-cost alternative to invade Gillette’s market from the bottom up. With an $8,000 budget and the help of a hilarious promotional video that went viral with over 25 million views, the entrepreneur Michael Dubin launched Dollar Shave Club, an ecommerce startup that delivers razors by mail. After the promotional video was uploaded on YouTube in March 2012, some 12,000 people signed up for Dollar Shave membership within the first 48 hours. It also raised more than $20 million in venture capital funding from prominent firms such as Kleiner Perkins Caufield & Byers and Andreessen Horowitz, among others. Dollar Shave Club followed up with ad-vertising on regular television in addition to its online campaigns and has expanded its product lines with the introduction of additional personal grooming products. Dollar Shave Club is an ecommerce company that uses a subscription-based business model. As the compa-ny’s name suggests, its entry-level membership plan deliv-ers a razor and five cartridges a month for just $1 (plus $2 shipping). The member selects an appropriate plan, pays a monthly fee, and will receive razors every month in the mail. Dollar Shave Club is using a business model innovation to disrupt an existing market. Technology is defined as the methods and materials used to achieve a commercial objective. The technology or method here is the business model innovation, a potent competitive weapon. The entrepreneur identified the need in the mar-ket for serving those who don’t like to go shopping for razors and certainly don’t like to pay the high prices com-manded by market leaders such as Gillette. Procter & Gamble’s competition also took notice.
Unilever, P&G’s European rival, has long stayed away from the U.S. wet shaving market because Gillette was so dominant. But seeing how Dollar Shave Club dis-rupted Gillette, resulting in a rapid market share decline, Unilever saw its opening. The Anglo-Dutch multina-tional consumer products company, with some $60 bil-lion in annual revenues and thus roughly the same size as P&G, offered a whopping $1 billion in cash in 2016 to buy Dollar Shave Club. Not a bad offer for a five-year-old startup. Michael Dubin happily accepted the offer and sold Dollar Shave Club to Unilever. With sales of razors and razor blades moving rap-idly online, Unilever is hoping to leverage this business model innovation to unseat Gillette’s dominance in the U.S. market. But Gillette responded swiftly by offering its own subscription-based service (Gillette Shave Club) and by lowering prices up to 20 percent, an un-imaginable move in recent history. Successful innova-tions also led to imitations. A mere two years after
Dollar Shave Club started, two entrepreneurs founded Harry’s, also an online, subscription-based mail order business for shaving equipment. After Target invited Harry’s to put displays in all its stores in 2016, its busi-ness took off. This was a smart move on Target’s part because it allowed Target to put pressure on Gillette, which held more or less a monopoly position as a sup-plier with 75 percent market share. Similar to Dollar Shave Club, Harry’s business is growing rapidly. As a consequence of increased competition, Gillette’s mar-ket share in the $3 billion market for razors and razor blades has declined from some 75 percent in 2010 to about 50 percent by 2019, and continues to slide.
Respond to post # 1 (R.P)
Netflix would be the great disrupter of the cable and satellite industry. The fact that Netflix offers on demand movies and series, old and new, for a simple monthly price, is priceless. Many consumers have "cut the cord" meaning they discontinued cable or satellite service, and when it comes to television watching, Netflix has been a front-runner since it first hit the television scene August 29, 1997. Television enthusiast have been loyal to the Neflix brand. Since watching television has become surprisingly popular again, many other applications has mimicked Neflix and followed suit. There are so many different television applications that offer movies, live television viewing, as well as news programs and television series. Welcome to the world of television again and Netflix made it a popular family activity again.
Discussion board # 2
Recall "MiniCase 4: Nike's Core Competency: The Risky Business of Creating Heroes." The case discusses the risks associated with using celebrity athletes in marketing. Discuss another company that experienced negative situations with using celebrity athletes. Do you believe they handled the fall-out well? Why, or why not?
Reading:
NIKE IS A globally recognized brand and the undisputed leader in the athletic shoe and apparel industry. The number-two leader, Adidas, has achieved $26 billion in sales, while recent entrant Under Armour reported $5 billion in revenues. Nike is tremendously successful, holding close to a 60 percent market share in running shoes and nearly a 90 percent market share in basket-ball shoes and apparel. As an indicator of Nike’s sus-tained competitive advantage, the brand has outperformed the S&P 500 index, a common bench-mark to proxy the broader stock market, by a wide mar-gin over the past decade (see Exhibit MC4.1), wherein its annual revenues doubled. These revenues are ex-pected to reach $40 billion by 2020. Yet one of its greatest strengths can also be seen as
one of its greatest vulnerabilities. To understand that strength, it helps to know how Nike started.
Nike Co-founders: Bill Bowerman and Phil Knight
The Beaverton, Oregon, company has come a long way from its humble beginnings. It was founded by University of Oregon track and field coach Bill Bowerman and middle-distance runner Phil Knight in 1964 and was first called Blue Ribbon Sports. In 1971, the company changed its name to Nike (after the goddess of victory in Greek mythology) and called upon a Portland State University graphic de-sign student to design its now iconic “swoosh.” Knight, who was teaching at the university at the time, paid the student $35 for it. By the summer of
hat year, Nike’s swoosh logo was registered at the U.S. Patent and Trademark office.
BOWERMAN’S INNOVATION. Coach Bowerman was a true innovator because he was constantly seeking ways to give his athletes a competitive edge. He experimented with many factors affecting running performance, from different track surfaces to rehydration drinks. Bowerman’s biggest focus, however, was on designing a better running shoe. While sitting at the breakfast table one Sunday morning and absentmindedly looking at his waffle iron, Bowerman had an epiphany. He poured hot, liquid urethane into the waffle iron—ruining it, of course. But through this process, Bowerman came up with the now-famous waffle sole that provided better traction than and weighed a lot less than traditional running shoes.
KNIGHT’S DISRUPTION. After completing his undergraduate degree at the University of Oregon and serving in the U.S. Army, Phil Knight entered Stanford University’s MBA program. One entrepreneurship class required him to come up with a business idea, so he focused on how to disrupt the leading athletic shoemaker, Adidas. The research question he came up with was, “Can Japanese sports shoes do to German sports shoes what Japanese cameras have done to German cameras?”1 At the time, Adidas athletic shoes were the gold
standard. They were also expensive and hard to find in the United States. After several failed attempts to interest Japanese sneaker makers, Knight managed to strike a distribution agreement with Tiger Shoes (a forerunner of today’s ASICS footwear company, which is known for high-quality athletic shoes that fall in the higher price range). After Knight’s first shipment of running shoes arrived, he sent some to Coach Bowerman, his running coach during his track-and-field days at University of Portland, hoping to make a sale. To Knight’s surprise, Bowerman expressed interest in becoming business partners and contributing his innovative ideas on how to improve running shoes, including his original waffle design. With an investment of $500 each and a handshake, the venture commenced.
Creating Heroes
By the late 1970s, because of a highly successful string of innovations, including the Nike Air, Nike had reached a considerable level of success. By 1979, the company had captured more than a 50 percent of the U.S. market share for running shoes. A year later, Nike went public but had yet to establish one of its most ef-fective marketing tactics. In 1984, Nike signed Michael Jordan—still early in
his career, before he was hailed by many as the greatest basketball player of all time—with an unprecedented multimillion-dollar endorsement deal. Rather than spreading its marketing budget more widely as was common in the sports industry at that time, Nike made the unorthodox move to spend basically its entire bud-get for a specific sport on a single star athlete. Nike sought to sponsor future superstars that embodied an
2016 Source: Depiction of publicly available data. Values are normalized to allow for direct comparison.
unlikely success story. Michael Jordan did not make the varsity team as a junior in high school, and yet he became (one of) the greatest basketball player ever. Nike’s Air Jordan basketball shoes are all-time classics that remain popular to this day. In the 1990s and 2000s, Nike continued to sponsor
track and field stars such as Marion Jones as well as basketball stars such as Kobe Bryant. Eventually, it expanded its scope to include golf prodigy Tiger Woods, tennis champion Serena Williams, cycling celebrity Lance Armstrong, soccer star Wayne Rooney, and football legend Michael Vick. Some of these names likely evoke associations with scandal as much as they do athletic achievement—therein lay both the power and the risks of sports celebrity endorsements. The company continues to make mega-deals with
athletes such as LeBron James, Kevin Durant, Megan Rapinoe, Naomi Osaka, and Christiano Ronaldo. In 2017, football wide receiver Odell Beckham, Jr. made headlines with an estimated $25 million endorsement deal with Nike, the highest endorsement contract in the National Football League. Nike’s largest endorse-ment agreement, however, is with NBA all-star LeBron James. The company extended its endorsement and entered a lifetime deal with James in 2015. The specifics have not been disclosed, but the total value of the deal is estimated near $1 billion. In 2019 alone, Nike paid some $1.5 billion in endorsement contracts, with a net income of $4 billion. Nike’s message is about unlocking human potential,
which is captured in its mission to bring inspiration and innovation to every athlete in the world (and if you have a body, you are an athlete).2 Nike uses its heroes to tell the story that through sheer will, tenacity, and hard work, anyone can unlock the hero within and achieve amazing things if they would only Just Do It! Ulti-mately, Nike is all about making heroes. This type of mythical branding has allowed Nike to enter, and often dominate, one sport after another—from running to ice hockey. It spends more than $1 billion a year sponsor-ing athletes and will sponsor only those known for suc-ceeding despite and against all odds, for example, cancer survivor and cyclist Lance Armstrong, double amputee “blade runner” sprinter Oscar Pistorius, and other athletes hailing from disadvantaged backgrounds. Nike astutely focuses on its core competency in ath-lete sponsorship as well as shoe and apparel design, while it outsources noncore activities such as manufac-turing and much of retailing. To create heroes, Nike has to engage in a number of activities: • Find athletes that succeed against the odds. • Identify them before they are well-known superstars.
• Sign the athletes. • Create products that are closely linked with the athlete. • Promote the athletes or teams and Nike products through TV ads and social media to create the de-sired image.
Each activity contributes to the relative value of the
product and service offering in the eyes of potential customers and the firm’s relative cost position vis-à-vis its rivals. Over time, Nike developed a deep expertise in creating heroes. More importantly, having consis-tently better expectations of the future value of resources allows Nike not only to shape the desired image of the athlete, but also to capture some of the value these athletes create.
WHEN HEROES FALL. Although the hero core competency has contributed to Nike’s sustained success, it has also raised some scandals, putting the brand at risk. Over the years, some of Nike’s “heroes” were unmasked as cheaters, frauds, and criminals;
others have been convicted of felonies. But as long-time CEO and Chairman Phil Knight declared long ago, scandals are “part of the game.”3 With that statement, it appears that Nike is tolerant of such risks—at least in some cases. In others, it simply is not. When NBA star Kobe Bryant was accused of rape,
Nike continued to sponsor him (Bryant was later cleared of all charges). When Tiger Woods found him-self engulfed in an infidelity and sex scandal in 2009, Nike also continued to sponsor him—a decision for which Nike felt vindicated after his Masters victory in 2019 (his first major championship since 2008). But when NFL quarterback Michael Vick was convicted of running a dog-fighting ring and engaging in animal cru-elty in 2007, which caused a public outcry, Nike ended his endorsement contract. However, in 2011, after serv-ing a prison sentence and restarting his career at the Philadelphia Eagles, Nike signed a new endorsement deal with Vick. In 2012, Nike terminated its long-term relationship with disgraced cyclist Lance Armstrong. Just before Armstrong’s public admission to doping during an interview with Oprah Winfrey, Knight was asked whether Nike would ever sponsor Armstrong again, to which Knight replied, “Never say never.”4 In 2013, Nike removed its ads showing Oscar Pistorius and the unfortunate tagline, “I am the bullet in the chamber,” after the South African track and field ath-lete was charged with homicide; he was later convicted. In 2014, Nike got entangled in the FIFA (the world
governing body of soccer) bribery scandal, which began 20 years earlier; after the United States hosted the 1994 World Cup, Nike decided it wanted to gain a stronger presence in soccer. In 1996, it signed a long-term sponsorship agreement worth hundreds of mil-lions of dollars with the Brazilian national team. This was a huge win for Nike because soccer has been the basis of Adidas’ success, much like running and basket-ball have been for Nike. At the time, Brazil had already won the tournament five times (more than any other nation) and was the only team to have played in every tournament thus far, which is only held every four years. Nike is alleged to have paid some $30 million to a middleman, who used that money for bribing soccer officials and politicians in Brazil. This middleman—Jose Hawilla—has admitted to a number of crimes including fraud, money laundering, and extortion related to the FIFA soccer investigation by U.S. prosecutors. Nike may be at a point where it is facing the Icarus paradox—that is, its greatest strengths are becoming its greatest weakness. The Icarus paradox describes the phenomenon of abrupt failure after a period of tremen-dous success. It is named after Icarus, a figure in Greek mythology. As the story goes, Icarus was able to escape prison with the help of a pair wings made out of a wood frame, beeswax, and feathers. Not only did Icarus fly out of jail, but he also found that he loved flying so much that he soared higher and higher, despite warn-ings not to get too close to the sun. Alas, Icarus failed to heed this warning. He got too close to the sun and his wings melted, causing him to plunge to his death. Time and time again Nike’s heroes have fallen from
grace, causing the company itself to also fall under sus-picion of wrongdoing. Clearly, Nike’s approach in building its core competency of creating heroes is not without risks. Too many of these public relations flops combined with too severe shortcomings of some of Nike’s most celebrated heroes could damage the com-pany’s reputation and lead to a loss of competitive advantage. Disappointment with the brand and its promise may eventually set in, causing customers to go elsewhere.
Nike Endorser Colin Kaepernick: Inspirational or Controversial?
In the fall of 2018, Nike ran a U.S.-based ad featuring Colin Kaepernick with the tagline “Believe in some-thing, even if it means sacrificing everything. Just do it.”5 Some considered the ad inspirational and others controversial. Why? In 2016, NFL quarterback Colin Kaepernick (a free
agent then playing for the San Francisco 49ers) knelt on one knee instead of standing during the national anthem as an act of protest against police brutality and racism in the United States. The anthem, which is always played before the start of any live professional sporting event, was televised and thus visible to mil-lions of people. The action was supported by many, inspiring other athletes to take the knee during the playing of the national anthem; it also catalyzed the Black Lives Matter movement. Yet it enraged others, inciting accusations that Kaepernick was unpatriotic. Many demanded that he be blacklisted by NFL teams. After the 2016 season, Kaepernick was not signed
by any NFL team, despite having been the starting quarterback for the 49ers and having favorable perfor-mance statistics relative to other players that were signed. In 2017, Kaepernick filed a grievance, alleging that all 32 NFL teams colluded in not signing him,
thus preventing him from working, because of his pro-test action. In 2019, the NFL settled the matter by pay-ing Kaepernick $10 million, even though Kaepernick’s market value as a NFL quarterback is estimated to be about $15 million a season; by the time of the settle-ment, he had not played for two seasons. The marketing opportunity surrounding Kaepernick
was tailor-made for Nike, which has been trying to appeal to younger consumers with people and cam-paigns that promote doing or standing for something meaningful. Adidas, which recently has become more popular with the under-18 crowd, now poses a signifi-cant threat to Nike. Thus, winning over this next gen-eration of customers has become even more critical for the firm. Moreover, Adidas boasts major endorsements itself from such pop superstars as Kanye West and Pharrell Williams. In the wake of the Kaepernick ad, Nike and Kaepe-rnick gained tremendous visibility. Kaepernick became the most mentioned athlete on Twitter, way ahead of sport greats such as Lionel Messi, Cristiano Ronaldo, Serena Williams, and LeBron James. Likewise, Nike also became the most mentioned company on Twitter, four times more than Apple, the next most mentioned company. At the same time, the hashtag #NikeBoycott started trending. Whether the new ad will result in increased sales for Nike, or whether the boycott will hurt sales, remains to be seen. Nike and Colin Kaepernick took the spotlight again
in the summer of 2019. Nike had planned to release a limited edition of U.S.A.-themed sneaker (a version of the Air Max 1), featuring an early American flag that was flown during the Revolutionary War, with 13 white stars in a circle symbolizing the original colonies, com-monly known as the Betsy Ross flag after its designer. Nike did not consult Colin Kaepernick about the design of the shoe commemorating Independence Day. Kaepernick saw photos of the shoe on Twitter shortly after its release. The former football quarterback turned social activist and celebrity endorser for Nike vehemently objected to the sneaker design as he was concerned about associations of the Betsy Ross flag with an era of slavery and its adoption by some extrem-ist groups. Following Colin Kaepernick’s intervention, Nike decided to pull the shoe from all U.S. retailer
Respond to post # 2
In 2012, Trek bicycles cut ties with Lance Armstrong after conclusive evidence from the US Anti-Doping Agency (USADA), along with an admission from Armstrong, found him guilty of using performance enhancing drugs. At the time Armstrong had been the face of the company for 14 years, during his seven consecutive Tour de France wins. Armstrong’s success brought millions of new viewers to the sport of cycling, and Trek initially struck gold with the cyclist with an inspirational story. Because of the endorsement, there was a huge potential for some buyers to go with other brands of cycles. The company however made the statement that “the bike brand and the bikes stand in the market on their own among the riders and that’s what’s going to move bikes in shops”(Delaney, 2012). Since that time, Trek has continued to be an industry leader, with over a billion dollars in revenue. By continuing to build quality products, with high quality materials, the company has been successful regardless of negative publicity related to Armstrong.
