Some lessons for components manufacturers that could help them do much better than their competitors.
The electronics industry is the pioneer when it comes to ingredient branding. There have been many great and iconic cases, and there is a lot to learn from these.
The computer industry brought ingredient branding to the forefront. Assembling desktop computers using branded components was a viable way to save money for the end user. An assembler could take a Seagate hard disk, Intel processor, Samsung monitor and Logitech mouse to create a computer as good as an HP or Compaq desktop.
The slow shift to the laptop eliminated the ability to assemble. However, by then, the industry was operating on well-known ingredient brands, processors, hard disks, monitors and mice. Although the assembling industry was not threatening computer brands, the result of this ingredient branding was that there was not much differentiation between an HP or a Compaq or an IBM.
What is an ingredient brand
When a component product builds a brand, it is called an ingredient brand. It is not built with the customer as the target. Instead, it is built with the end user in mind. When the end user knows the brand well, it creates pull for the brand.
Many companies feel that if their customers know them and their companies are well known in the industry for providing quality products, they have a brand.
But, I beg to differ. The end user needs to know the company and its products. The company needs to create some pull for its products for it to truly call itself a brand.
Until the first brand in the component category takes that first step to build a brand, the category is largely commoditised. Now the question is, what is a commoditised category?
It is a category in which no player has built a brand in a significant manner. Players remain largely unknown to the end user. And because of that, no one player can command a price premium for each sale it makes. Players build relationships with their customers by providing good quality at best possible prices, and get sales based on that, rather than the strength of the brands.
Benefits of ingredient branding
An ingredient brand goes into making the finished product. The finished product uses the ingredient brand to be sold, because it adds credibility to its quality. It also allows the finished product manufacturer to charge a premium.
For the ingredient brand, the ability to charge a premium is the single biggest advantage of investing in brand-building. Because the end user desires a finished product that uses its ingredient, it allows the ingredient to charge a premium, which the finished product passes on to the end user.
Another critical benefit for the ingredient brand is not being substituted. Once the finished product starts relying on the ingredient to make a sale, it reduces the ability of the finished product to substitute the ingredient with another component. Some might argue that this is even more important than charging a premium, because it ensures business continuity.
Be the first mover
One critical thing for a component to become an ingredient brand is that it needs to be first. The first player tends to become the market leader and remain so, provided it does not make a hash of its marketing efforts.
The first mover usually is seen as the expert by the end user. Players that follow—yes, they will follow—are seen as me-too players.
Let us now look at how ingredient branding is done, by looking at cases of others who have done it well.
This is the case of the century with regards to ingredient branding. It is one of the most successful cases ever.
We go back to before Intel was known to the world. By 1990, Intel had launched its 386 chip, which was being supplied to PC manufacturers like Compaq, IBM and HP. But, things started to turn, and Intel started losing market share. It discovered the reason to be Cyrix, another chip maker. Cyrix was reverse-engineering Intel’s chip and selling it for half the price. PC manufacturers were also willing to replace Intel with Cyrix. Afterall, who would not if it meant getting similar quality at a lower price.
But Intel was ambitious. The product it was fighting was a me-too one, and it did not want to battle it out based on price. The decision Intel took changed the computer industry forever.
It did two key things. The first was a business model decision. Intel chose to work with its customers differently. It decided to partner with them. This was not just in name, like many customer-centric programmes. Neither was it just smoke and mirrors.
Intel put its money where its mouth was, and took a huge risk. It decided to part-fund its customers’ marketing efforts. In exchange, its customers put their Intel Inside logo on the machine and carton as well as in advertising. This was a mutually-beneficial relationship to build the PC market.
The second was an education campaign with the end user. Intel realised that for the end user what is inside the box was unknown, not understood and probably too technical. So, it decided to educate the end user on the importance of the processor. The campaign it developed had two objectives. The first was to position the processor as the heart of the PC that is responsible for the speed of the PC. The second was the compatibility of the processor with a multitude of software.
Both these efforts helped build a brand for Intel with the end user, thereby creating pull for the brand.
Takeaway. Intel made the end user its target audience. Even though the end user was not buying a processor, it was buying a computer. The education campaign usurped the computer. By calling it the heart of the PC and saying it was responsible for the speed of the PC, it made itself the most critical component of the PC. And over time, more important than the brand of the PC.
Intel did not sign any exclusivity agreement with any one PC manufacturer. That ended up reducing differentiation between PCs. IBMs, HPs and Compaqs all had Intel processors. Because of that, the focus shifted from the PC to the processor.
The brand soon started charging 400 per cent premium over Cyrix. It got back the market share it had lost. Overall, Intel has dominated the PC market ever since.
When we think of Dolby, we think of incredible sound. It is everywhere, including films, TVs, cellphones and so on. But there is a lot to learn about how a company can get to this point—the things it did right and what it did not.
Ray Dolby, who died in 2013, was an engineer by profession who dabbled in sound technology even before he founded the company. The first technology he came up with was a first-in-the-world one. He figured out how to reduce the hiss that happens while recording sound. This he called noise reduction (NR).
That was the beginning of an incredible journey. Dolby first got sound studios in England to adopt NR. Soon, US sound studios followed suite. He rode the whole wave of cassette tapes and tape players. He moved into providing NR sound for movie theatres.
At the very beginning, Dolby decided it would manufacture professional products only and license technologies appropriate for consumers. But the big inflection point came when Star Wars used Dolby to provide sound for the film. Even though state-of-the-art sound was being used in albums and concerts, in movies it was a commoditised category. Stephen Katz, sound consultant from Dolby who worked on Star Wars, said, “Sound was a very important component for Star Wars, and it was a component that Hollywood virtually ignored. People used to tell me, ‘Nobody listens to the sound.’” Well, not until George Lucas decided to change it. It is his vision that Dolby brought to life.
None of the movie theatres were fitted with Dolby sound, but Twentieth Century Fox insisted that if they wanted the 70mm print (vs the 35mm), they needed to install Dolby.
And because very few movie theatres had made that shift, initially Star Wars released with only 40 prints as against the usual 800 prints. And, only three prints had Dolby sound.
The film created such magic that things took off from there. Movie theatres clammored to have Dolby sound. Without Star Wars, Dolby would not be where it is now. Also, without Dolby, Star Wars would not be as magical, either. Sound added a lot to the film. So much so that the industry henceforth looked at sound differently. It was no longer a commoditised product.
Dolby’s journey did have a hiccup when it did not realise the impact of digital audio on cinemas. Sound until now, although of excellent quality, was analogue. And, an entrepreneur, Terry Beard along with Steven Spielberg, Universal Studios and other investors created Digital Theatre Systems (DTS). Dolby lost out and took a few years to gain back the leadership, which it determinedly did.
Dolby’s business focus has been innovation and patent protection. It has made most of its money through licensing. As of 2018, it still makes 90 per cent of its revenue through licensing, and 10 per cent through products and services.
Now, Dolby has proliferated every aspect of our lives. The movie theatre product is Dolby Atmos, which it has moved beyond audio into video by adding Dolby Vision.
Its home theatre product is Dolby Digital Plus. Dolby is working with companies to provide its products on smartphones, TVs, games, tablets, streaming services, headphones, movie theatres, sound studios and more.
Takeaway. Dolby is a company that has innovated consistently to improve its own products. It has worked to make itself redundant, so no one else can. This focus on innovation has meant that it has rarely needed to rely on buying technology from outside the company. The decision to focus on top-end professionals and leave the rest to licensing ensured a continuous inflow of funds, so much so that it did not feel the need to go public until 2005. Its relentless focus on patenting has resulted in it having 8100 issued patents and 4200 pending patents in 100 countries, as of 2017.
Dolby also works with its customers to ensure there are no design mistakes in its products and that it is of high quality. One of the key decisions that Dolby has taken is to keep Dolby licensing affordable, so companies would rather use the technology than not. This has made the technology accessible and available everywhere, and kept competition out to a large extent. This has prevented it from being substituted by DTS. Even though it lost out to DTS initially, it managed to make a comeback.
The bottom line
Both products, before they decided to build an ingredient brand, belonged to commoditised categories. It always takes a bold mindset on someone’s part to make moves like these. Dolby and Intel both built their brands with the end user of the finished products that their products go into, so that there is pull for the brands.
Intel provided funds to its customers’ marketing budgets, which built loyalty and prevented substitution.
And, Dolby made licensing affordable, and made sure the technology was great. This is what prevented others from dominating and for them to come back in the race.
Principles followed by the cases in this article can be used by many businesses:
- To create partnerships with customers
- To focus on product—innovating to make yourself redundant, so no one else does
- To recognise the stage your product is at, and identify whether education is needed or competitive communication
- To look out for new technologies and to not miss them out, like Dolby did with digital
- To use topical happenings or big moments in your industry to your advantage, as these can be big inflection points in your industry—the way Dolby did with Star Wars
Part 2 of this article will explore more such examples.
Abhimanyu Mathur is executive vice president, Lowe Lintas (part of MullenLowe Lintas Group)