10

The Law of Division

Over time, a category will divide and become two or more categories.

Like an amoeba dividing in a petri dish, the marketing arena can be viewed as an ever-expanding sea of categories.

A category starts off as a single entity. Computers, for example. But over time, the category breaks up into other segments. Mainframes, minicomputers, workstations, personal computers, laptops, notebooks, pen computers.

Like the computer, the automobile started off as a single category. Three brands (Chevrolet, Ford, and Plymouth) dominated the market. Then the category divided. Today we have luxury cars, moderately priced cars, and inexpensive cars. Full-size, intermediates, and compacts. Sports cars, four-wheel-drive vehicles, RVs, and minivans.

In the television industry, ABC, CBS, and NBC once accounted for 90 percent of the viewing audience. Now we have network, independent, cable, pay, and public television, and soon we’ll have instore and interactive television.

Beer started the same way. Today we have imported and domestic beer. Premium and popular-priced beers. Light, draft, and dry beers. Even nonalcoholic beer.

The law of division even affects countries. (Witness the mess in Yugoslavia.) In 1776, there were about 35 empires, kingdoms, countries, and states in the world. By World War II, the number had doubled. By 1970, there were more than 130 countries. Today, some 190 countries are generally recognized as sovereign nations.

Look at the music field. It used to be classical and popular music. To stay on top of the popular music field you could watch “Your Hit Parade,” which featured the top 10 hits of the week. Radio adopted the same idea with a “Top 40” format. Today Top 40 is falling apart because there isn’t one list anymore.

Billboard, the bible of the music business, has 11 separate hit lists: classical, contemporary jazz, country, crossover, dance, Latin, jazz, pop, rap, rhythm and blues, and rock. And 11 leaders for the 11 categories. They recently included Itzhak Perlman, Four-play, Garth Brooks, Luciano Pavarotti, Michael Jackson, Mi Mayor Necesidad, Dave Grusin, Enya, Public Enemy, Vanessa Williams, and Bruce Springsteen.

Each segment is a separate, distinct entity. Each segment has its own reason for existence. And each segment has its own leader, which is rarely the same as the leader of the original category. IBM is the leader in mainframes, DEC in minis, Sun in workstations, and so on.

Instead of understanding this concept of division, many corporate leaders hold the naive belief that categories are combining. Synergy and its kissing cousin the corporate alliance are the buzzwords in the boardrooms of America. IBM, according to the New York Times, is poised “to take advantage of the coming convergence of whole industries, including television, music, publishing and computing.”

“IBM’s strongest suit,” says the Times, “in the expected convergence of cable and telephone networks with computer and television manufacturers may be technology that it has developed to create extremely high-speed networks.” (See chapter 20: The Law of Hype.)

It won’t happen. Categories are dividing, not combining.

Also look at the much-touted category called “financial services.” In the future, according to the press, we won’t have banks, insurance companies, stockbrokers, or mortgage lenders. We’ll have financial services companies. It hasn’t happened yet.

Prudential, American Express, and others have fallen into the financial services trap. Customers don’t buy financial services. They buy stocks or life insurance or bank accounts. And they prefer to buy each service from a different company.

The way for the leader to maintain its dominance is to address each emerging category with a different brand name, as General Motors did in the early days with Chevrolet, Pontiac, Oldsmobile, Buick, and Cadillac (and recently with Geo and Saturn).

Companies make a mistake when they try to take a well-known brand name in one category and use the same brand name in another category. A classic example is the fate that befell Volkswagen, the company that introduced the small-car category to America. Its Beetle was a big winner that grabbed 67 percent of the imported-car market in the United States.

Volkswagen was so successful that it began to think it could be like General Motors and sell bigger, faster, and sportier cars. So it swept up whatever models it was making in Germany and shipped them all to the United States. But unlike GM, it used the same brand, Volkswagen, for all of its models.

“Different Volks for different folks,” said the advertising, which featured five different models, including the Beetle, the 412 Sedan, the Dasher, the Thing, and even a station wagon. Needless to say, the only thing that kept selling was the “small” thing, the Beetle.

Well, Volkswagen found a way to fix that. It stopped selling the Beetle in the United States and started selling a new family of big, fast, expensive Volkswagens. Now you had the Vanagon, the Sirocco, the Jetta, the Golf GL, and the Cabriolet. It even built a plant in Pennsylvania to build these wondrous new cars.

Unfortunately for Volkswagen, the small-car category continued to expand. And since people couldn’t buy a long-lasting, economical VW, they shifted to Toyota, Honda, and Nissan.

Today Volkswagen’s 67 percent share has shrunk to less than 4 percent.

Volkswagen isn’t some minor European brand like Saab or Alfa Romeo. Volkswagen is the largest-selling automotive brand in Europe. The cars VW sells in the United States are the same as the ones it sells in Europe. Only the minds of the people buying them are different. In America, Volkswagen means small and ugly. Nobody here wants to buy a big, beautiful Volkswagen (chapter 4: The Law of Perception).

One of Volkswagen’s competitors, Honda, decided to go up-market. Rather than use the Honda name in the luxury-car market, it introduced the Acura. It even took the expensive step of setting up separate Acura dealerships to avoid confusion with Honda.

The Acura became the first Japanese luxury car in the United States, where today Honda sells many more Acuras than Volkswagen sells Volkswagens. Honda now has the leading brand in two categories.

What keeps leaders from launching a different brand to cover a new category is the fear of what will happen to their existing brands. General Motors was slow to react to the super premium category that Mercedes-Benz and BMW established. One reason was that a new brand on top of Cadillac would enrage GM’s Cadillac dealers.

Eventually, GM tried to take Cadillac up-market with the $54,000 Allante. It bombed. Why would anyone spend that kind of money on a so-called Cadillac, since their neighbors would probably think they paid only $30,000 or so? No prestige.

A better strategy for General Motors might have been to put a new brand into the Mercedes market. (They might have brought back the classic LaSalle.)

Timing is also important. You can be too early to exploit a new category. Back in the fifties the Nash Rambler was America’s first small car. But American Motors didn’t have either the courage or the money to hang in there long enough for the category to develop.

It’s better to be early than late. You can’t get into the prospect’s mind first unless you’re prepared to spend some time waiting for things to develop.