Physicians, Insurance Companies and Incentives

May 27, 2014

Incentives motivate everyone. When someone rewards us for something, we tend to do more of it. Carrots really work.

Insurance giant WellPoint is taking the idea to heart. According to an article in today’s Wall Street Journal, the company will soon start offering oncologists $350 a month for every patient on one of the insurer’s recommended regiments.

This is real money for a physician. The WSJ article quotes a doctor from the Cleveland Clinic saying the payment “…is not something we’d ignore.”

I suspect WellPoint isn’t doing this just to help patients; the company is trying to save money.

It is safe to assume that WellPoint’s regiments won’t include aggressive use of the most expensive therapies. The company will likely encourage physicians to stick with effective and inexpensive drugs.

This sets up a conflict between an oncologist and her patients. Does the oncologist use a therapy with modest efficacy that complies with WellPoint’s guidelines and preserves the $350 per month payment? Or should she try a newer therapy that might work better and take the financial hit?

Incentives in healthcare are complicated. When making a treatment decision, remember that insurance companies and physicians are motivated by many incentives and the only people 100% committed to your health are you and your loved ones.

 

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Last week more than forty marketers from sixteen different countries gathered in Evanston for the Kellogg on Branding program. The group included an incredible mix of companies: technology firms, military suppliers, major league sports teams, pharmaceutical companies, hotel chains, not-for-profits and more. It was a fascinating few days.

The next session of Kellogg on Branding is October 5 to 10. You can read more about and sign up for the program here:

http://www.kellogg.northwestern.edu/execed/programs/brand.aspx

Three Questions about Amazon

May 12, 2014

Amazon recently released its quarterly results. The company grew revenue sharply, exceeding $16 billion for the quarter. Profit, well, there wasn’t much of that. The company made just $82 million, a margin of 0.5%.

Amazon is a very strange operation. Here are three questions to think about.

 

Question #1: Where is the profit?

Amazon is not a very profitable company. Indeed, it isn’t far from being a non-profit organization.

The company’s latest quarterly results were not an exception; Amazon has a long history of limited profitability. Last year Amazon had net income of just $274 million on revenue of $74.5 billion, just 0.36%. This was actually an improvement; Amazon lost money the prior year. New companies often lose money but Amazon is not a new venture.

The issue isn’t that retailing is an impossible business. Last year Wal-Mart made $15.9 billion. Gap made $1.3 billion. Even Lululemon made more than Amazon, delivering $280 million in net income despite having just 2% of Amazon’s revenue.

Amazon’s lack of profitability is breathtaking.

 

Question #2: Why do people buy the stock?

Amazon’s close to non-profit status is not a problem for investors. Even after a recent drop, Amazon’s stock is over $300 per share, giving the company a market cap of $134.5 billion. Amazon’s P/E ratio is 473. Wal-Mart’s is 16. Lululemon’s is 23.

Investors clearly believe the future is bright for Amazon. Anyone buying the stock must be fairly confident that Amazon will eventually make big profits.

To justify the stock price, investors are apparently counting on an amazing transformation. If we take Wal-Mart’s P/E ratio of 16 as typical for a large retailer, then people must think Amazon’s profit will eventually jump from last year’s $274 million to more than $8 billion.

 

Question #3: Will Amazon ever make big profits?

This, of course, is the critical question.

I predict it will come down to a simple issue: how much customer advantage does Amazon have? Is there a unique benefit people value and will pay more for? If there is, then Amazon can eventually raise prices, increase margins and deliver real profits. If there isn’t, then profits will be low; when Amazon raises prices people will simply buy from other firms.

My concern is that Amazon competes today partly on value. In many states it starts off cheaper than other retailers since Amazon doesn’t always have to pay sales taxes. With the company’s big selection, low prices and free shipping it is a tough proposition to beat.

But will people eventually pay a premium to buy from Amazon? I’m not at all certain. And that could be a long-term problem.

The LA Clippers, Donald Sterling and Branding

April 28, 2014

The LA Clippers are in the news today and not just for their playoff performance. A series of brands are dropping sponsorship deals with the team. It is an all-star list of companies including State Farm, CarMax, Kia and Virgin America.

The commotion began when TMZ released a taped phone call between Clippers owner Donald Sterling and his girlfriend V. Stiviano. In the conversation Sterling made a series of offensive and racist comments.

Brands are now moving as quickly as possible to distance themselves from Sterling and the Clippers. CarMax, for example, released a statement saying it was ending its team sponsorship, explaining, “These views directly conflict with CarMax’s culture of respect for all individuals.”

This is the correct move. A brand that stands by the Clippers runs the risk of being associated with Sterling and his views. A brand that drops its sponsorships sends a very different message: that it believes in acceptance and does not tolerate racism. It is an easy decision.

Sterling’s comments were so extreme that everyone will now abandon the Clippers. It is very clear that Donald Sterling will have to apologize and give up control of the team, at least for a while. His brand is simply too toxic.

Kraft’s Disappointing Annual Report

April 14, 2014

It is annual report season, the time of year when companies send out proxy information and annual reports to investors. I own a few shares in several companies so my mailbox fills up with these documents. It is interesting to see what the firms choose to send.

An annual report is an important branding tool. It is an opportunity for management to review business results and discuss where the company is heading. This is important information for many investors. The annual report is also an opportunity to communicate with and rally employees. A company can celebrate successes, recognize contributions and highlight the values that drive the firm.

I received Kraft’s annual report last week. I used to work at Kraft and enjoy learning what the company is up to.

Kraft’s mailing included a proxy statement and a 10-K form printed on flimsy paper. There was no CEO letter explaining the company’s direction and discussing the results. There was nothing on the company’s values. There was nothing about Kraft’s great employees and brands. The cover is a financial form. Here it is, in case you didn’t get one.

Kraft Annual Report

 

This is just embarrassing.

It is particularly bad because most people don’t even know what Kraft is anymore. The company split into two parts in late 2012, forming Kraft Foods and Mondelez. Kraft needs to establish its new identify. This is a critical moment for the organization.

So this year the executives at Kraft decided to send out the formal financial statement and skip the more reader-friendly version of the annual report entirely.

I’m sure Kraft saved a little money with the decision but this is an example of worrying too much about short-term savings and too little about investors, employees, and the brand.

Fortunately, many other companies do a better job. For example:

-United Technologies, Abbott, Mead Johnson and GE sent polished and impressive annual reports.

-Boeing, Lockheed Martin, Eli Lilly, CSX, UPS, Waste Management, PepsiCo and the New York Times sent the required financial information with a thoughtful business update.

-Kimberly Clark just sent the 10-K but at least put a cover on the financial statement.

When building a brand, everything matters. Companies can build short-term profits by cutting spending on things like the annual report but this type of thinking doesn’t create great brands that connect with people and endure.

The Great Breakfast Battle

April 4, 2014

Every once in a while you see two strong brands crash into each other in a desperate struggle for market share and customer loyalty. These Great Competitive Battles are always fascinating to watch and you can usually get some pretty good deals as the fight goes on.

In the United States, April will feature a GCB between Taco Bell and McDonalds.

Taco Bell made the first move by launching a new line of breakfast products including a Waffle Taco and the AM Crunchwrap.

To announce the new menu, Taco Bell found 25 people named Ronald McDonald and used them in a new advertising campaign. This generated a ton of publicity.

McDonalds wisely decided to fight back. The chain is the leader in the fast food breakfast segment; this is a huge and important business.

So McDonalds announced that it would be giving away free coffee for the next two weeks. I suspect McDonalds will also heavy up advertising support and encourage restaurant managers to deliver particularly good service over the next month.

It is all going to make for a very interesting April. Taco Bell will likely respond with deep discounts on its new breakfast items. McDonalds will then follow with even bigger discounts.

McDonalds is in a strong position to win this battle. Taco Bell has always struggled at breakfast. I’m not certain a Waffle Taco is really going to catch on. The entire imagery of the breakfast launch isn’t consistent with the broader Taco Bell brand.

McDonalds needs to defend ferociously for the next two months. After that, Taco Bell will have to assess its results. If sales are disappointing Taco Bell will retreat; the brand can’t keep investing in driving trial for months. It is simply too expensive.

Taco Bell might have made one notable mistake in its launch. Attacking Ronald McDonald was a clever idea but it forced McDonalds to defend. If Taco Bell had focused on a different creative concept, McDonalds might have ignored the launch; McDonalds doesn’t want to defend. There isn’t a lot of profit in free coffee.

Directly attacking a strong brand is never a good idea. Taco Bell took a risk and now McDonalds is fighting back.

Brands, Baseball and Missing the Call

April 2, 2014

Brayden King, one of my colleagues at Kellogg, is in the news this week with a new study about baseball. It is a fascinating bit of research and highlights why brands matter so much.

King worked with Jerry Kim from Columbia Business School on the study. They looked at umpire accuracy, comparing the umpire’s call to the actual pitch. Overall, they found that umpires incorrectly called about 14% of non-swinging pitches.

The research also showed that umpires favored well-regarded pitchers. They were 16% more likely to call a ball a strike (favoring the pitcher) for pitchers who had been to the All-Star Game five times, compared with pitchers who had never been to an All-Star game. They were also 9% less likely to call a strike a ball for All-Star pitchers.

In other words, the calls were significantly shaped by the umpire’s perception of the pitcher.

This study is yet another example of the power of brands. A brand shapes perceptions. A strong brand can make ordinary things special. A weak brand can make ordinary thing inferior.

If a pitcher has a strong reputation then umpires give him the benefit of the doubt. If a pitcher has a weak reputation, they don’t.

All of this is reinforcing, of course. A great pitcher gets better calls so enjoys better results. This makes people think the pitcher is very skilled and leads in turn to better calls and better results.

Building a strong, positive brand has to be a top priority. This is true whether you are running a brand, building a career or pitching a baseball.

* * *

After three trips to Europe in the past three weeks I’m happy to be back in Evanston starting the spring semester. I am teaching two sections of marketing strategy this spring and one section of biomedical marketing. It will be a busy stretch, especially with a several corporate programs along the way.

The next session of Kellogg on Branding is coming up May 18 to 23. It will be an entertaining week with some great learning about building strong brands. You can read more about it and register here: http://www.kellogg.northwestern.edu/execed/programs/brand.aspx Who knows, maybe some pitchers will take time off from the season to sit in. Clearly branding matters for them, too.

A Surprising (and Savvy) Move by Emirates

March 24, 2014

Tim Clark, president of Emirates Airline, was in the news recently when he said Emirates would prefer not to have a U.S. Customs and Border Protection post in Dubai.

On the surface, this seems like a surprising announcement.

Emirates Logo

A bit of background is in order. The U.S. has established customs posts in several countries including Ireland, Canada, some Caribbean nations and, most recently, Abu Dhabi. These allow people to clear immigration and customs before arriving in the United States. When the plane pulls up at the gate in the U.S., passengers can simply deplane and move on.

U.S. airline executives and union leaders attacked the recent move to open the Abu Dhabi base, claiming it would give the local carrier, Etihad, an unfair competitive advantage.

So is Emirates making a mistake?

I don’t think so. This is a smart decision by a savvy marketer.

Great brand builders know that experiences matter. If you have a great interaction with a brand, you tend to like it. The best brands, especially service brands, are built on a series of positive moments.

For Emirates, Dubai is critical; it is impossible to separate the Emirates brand from its enormous hub airport. When passengers move through Dubai smoothly they have a good experience. They also buy things at high prices. It strengthens the brand.

If passengers miss a connection or have to sprint through the terminal to catch a flight, they will be grumpy and frustrated and angry at both the Dubai airport and Emirates.

Dealing with U.S. border agents is generally not a positive experience. The lines are long. Times are unpredictable. People are stressed. If you are Emirates, you want to distance yourself from this operation as much as possible, especially because you have no control over it. Emirates can’t just dispatch some local gate agents to get people through U.S. immigration faster.

The way to build the Emirates brand is to give passengers a wonderful flying experience, including a smooth connection in a beautiful terminal in Dubai. Emirates should try to control every contact point. The last thing Emirates wants is a U.S. customs post creating stress and frustration.

When people arrive in the U.S. they might encounter a big line. This isn’t a problem for Emirates; passengers will blame the United States, not Emirates.

Emirates is a very successful and fast growing airline. One reason is that its executives know how to build a great brand.

GM’s Branding Disaster

March 11, 2014

General Motors is in the headlines today. Both the New York Times and the Wall Street Journal are reporting that a House committee is investigating how the company responded to issues with faulty ignition switches.

The story is astonishing.

Apparently in 2004 GM learned that several of its car models had a faulty ignition switch that sometimes turned off the vehicle for no reason, making it hard to control and disabling the air bags. The company considering making repairs but didn’t. At some point GM learned that the switch may have played a role in several fatal crashes. The company again considered fixing the problem but didn’t. More people died.

Now, a decade later, GM is getting ready to make the repairs. Only the company can’t actually make the repairs because it doesn’t have the parts or the capacity to implement a broad recall quickly.

What?

You should read that summary of events again.

GM knew it had a problem but somehow the company, on more than one occasion, decided not to fix it.

This is deeply concerning. It raises fundamental questions about GM’s company culture, willingness to make trade-offs and concern for safely and quality. This is a terrible development for the GM brand.

It could have a significant impact on the company. When there are many good car brands in the world, why buy from one that makes this sort of decision?

CEO Mary Barra understands the magnitude of the problem and the risk to the brand. She is taking personal ownership of the situation, making it a top company priority and bringing in outside assistance to understand precisely how this happened. I suspect she is incredibly frustrated and embarrassed.

Unfortunately, a committed CEO can only do so much in a huge company. The GM brand is in trouble.

An Odd Move by CVS

March 3, 2014

Pharmacy giant CVS recently announced that it would no longer sell tobacco products.

CEO Larry Merlo explained the decision in a statement, noting “Ending the sale of cigarettes and tobacco products at CVS/pharmacy is the right thing for us to do for our customers and our company to help people on their path to better health. Put simply, the sale of tobacco products is inconsistent with our purpose.”

On the surface the decision makes a lot of sense. CVS wants to become a leader in healthcare and selling tobacco products doesn’t align with this goal.

The announcement also generated a lot of positive publicity for CVS.

As a business decision, however, I find it very puzzling.

One thing seems clear: this is an expensive move. CVS sells more than $1.5 billion of tobacco products a year. While this is a small portion of the company’s total revenue, perhaps 2%, it is still a sizable business. If CVS makes a 30% margin on tobacco products, a fairly standard retail margin, the move has a cost of $450 million annually. In 2013 CVS had pre-tax profits of $7.5 billion, so a $450 million hit is meaningful.

The financial cost is clear. What is less clear is how this decision will lead to incremental sales.

Will people rush to CVS now that the company doesn’t sell tobacco? I suspect not. Most people choose a pharmacy based on convenience, service, price and insurance coverage.

Will people buy more at CVS when they visit? No.

Can CVS raise prices? No.

Will the move reduce operating costs? No.

So how in the world is it a good business decision?

The argument that tobacco isn’t a healthy product so CVS is dropping the category as a matter of principle just doesn’t make sense. Soda isn’t good for people, either, or alcohol or lottery tickets or Twinkies. CVS sells many things that aren’t good for people.

Some people argue that hospitals don’t sell cigarettes so CVS shouldn’t sell them, either. This argument doesn’t work. CVS isn’t a hospital. It is a pharmacy and a retailer.

CVS provides patient case under its Minute Clinic brand. Minute Clinic clearly shouldn’t sell tobacco or soda or lottery tickets. It also shouldn’t sell carrots or lettuce. Minute Clinic provides healthcare services. CVS sells products.

There must be more to this than meets the eye. Perhaps margins on tobacco products are so small that there actually isn’t a financial hit. Perhaps public interest groups pressured CVS to make the announcement. Perhaps CVS needs to bolster its credentials in a negotiation with government payers.

Otherwise it is just a bad business decision.

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My book Defending Your Brand is now available in paperback. You can find it at all the usual spots. Here is the Amazon link:  http://tinyurl.com/k346pjf

This week I head to Germany to teach in the Kellogg-WHU Executive MBA program. I always enjoy these classes; the students are from all over Europe and the Middle East. It should be an interesting session given everything that is going on now.

Sochi’s Olympic Surprise

February 24, 2014

The Sochi Winter Olympic Games wrapped up yesterday. Overall it was a surprising win for Russia and Sochi.

It was not a flawless event. Going into the Sochi Games the discussion focused on Russia’s approach to human rights, especially the LGBT community. The event kicked off with reports of unfinished hotel rooms and amusement parks. In recent days, the events in Sochi have been over-shadowed by the violence in the Ukraine.

All of this has been a problem for the Olympic sponsors, the companies that pay millions and millions to support the event.

Nonetheless, the Sochi Olympic Games went well. Over the past two weeks, the focus has been on the athletes, celebrating both achievements and disappointments. The biggest controversy seems to be whether Korea’s Kim Yu-na or Russia’s Adelina Sotnikova should have won in figure skating.

There have been no terrorist attacks, no major logistic problems and relatively few protests. The television coverage has been upbeat and positive.

This is good for all involved: the athletes, the sponsors, Sochi and Russia.

The event will help Russia. The country committed to putting on a first-class event and it did. This speaks to Russia’s resources and dedication. It helps Russia’s brand.

The event will help Sochi even more. The Winter Olympic Games are more powerful than the summer games because the host cities often have little awareness beforehand. Athens, Sydney and Beijing all had great brand awareness before hosting the Olympics. Turin, Nagano and Albertville did not.  The only reason most people know Lillehammer is that the town hosted the Winter Olympics back in 1994.

The world now knows Sochi and has a positive perception of the city and the region. This investment in brand building will pay dividends for decades to come.

*   *   *

I am a huge believer in defensive strategy. My book, Defending Your Brand: How Smart Companies Use Defensive Strategy to Deal with Competitive Attacks, explores the topic in great detail.

So I’m delighted that Paul Groundwater, a savvy marketer with experience at Kraft, Campbell Soup and Trane, has launched Deterrence Consulting, a firm focused on the topic. I’m serving as an advisor and strategist to the firm.  If you are facing a competitive threat, or worried about potential competitive threats, you should contact Paul. His website is: http://deterrenceconsulting.com/


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