Lin-Sanity, Crossover Appeal, and Exploitation of Willingness to Pay

By Tom Gibbs - February 29, 2012 | Tickers: CAJ, GM, NKE, XRX | 0 Comments

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Especially as a resident of New York City, the hype surrounding the New York Knicks’ “Lin-Sanity” craze has become an extremely exciting phenomenon.  Prior to the Harvard-educated, NBA underdog’s early-February breakout, he averaged less than six minutes per game and hardly contributed to the team as the Knicks went on a prolonged .500 win/loss streak.  (It hardly seems right to put “Harvard” and “underdog” in the same sentence). 

In the twelve games since Lin-Sanity was born, the sensation has averaged more than 37 minutes, 22 points, 2 steals, and 8 assists per game.  Efficiency-wise, Lin is within 1% of LeBron James’ and Mike Conley’s (NBA steals leader) points and steals per minute statistics, respectively, and has accounted for more than 2x as many assists per minute than the NBA’s assist leader in Steve Nash over the same time period. 

It would be too easy – as the hundreds of articles published on the Lin-Sanity craze since his early-February breakout have already proved – to tie the player’s recent success to cliché business lessons:

• “Believe in everyone on your team!
• “Commitment to the team is critical!”
• “A ‘can-do’ attitude is infectious”

These “business parallels” have little relevance, and have even less to teach someone about the ways businesses operate or generate sustainable competitive advantages.  If the Knicks, or even the Harvard basketball team, did not believe in Lin, why was he recruited to the team?  Do people in the business world receive such inflated hype for doing exactly what they are paid to accomplish? 

Although attempting to apply the basketball player’s success with generic business concepts is quite a stretch, this does not mean that there cannot be something extracted from the companies capitalizing on the Lin-Sanity hype (even more so than Jeremy Lin himself).  It has been proven that the popularity behind Lin’s rise can be projected to any consumer base to elicit many diverse consumer emotions.  Jeremy Lin has not only become a Knicks superstar, but he has become a fashion statement, he has become a readable story, he has become a $130 basketball shoe, and most interestingly (or, disgustingly?) he has become an ice cream flavor. 

This universal, almost “cross-over” appeal of the Lin brand name, much more so than the player’s determination during his rise to fame, contains parallels that are extremely applicable to the realm of business, the economic impacts of brand value, and the exploitation of different consumers’ willingness to pay.  More specifically, those corporations that can captivate consumers on different levels – being all things to all people, just as is the Lin brand name – using low cost horizontal growth techniques are generally those that are protected with sustainable competitive advantages.  These are the firms that are also characterized by a much more meaningful level of value creation than their competitors.   

Canon & Imaging Innovation

Aside from the relatively weak consumer electronics sector over the past several years, as well as the severely crippling operating hurdles established through the 2011 Japanese earthquake and tsunami, Canon (NYSE: CAJ) has historically been one of the great value creating companies. 

In examining the corporation’s performance prior to these macro events, between 2000 and 2007 Canon was able to grow sales at a 7.5% CAGR and expand gross and operating margins from 41.5% and 8.7%, respectively, to 50.1% and 16.9%, respectively, over the same time period.  The corporations return on investment prior to the 2009 recession and 2011 natural disasters (let’s call it “normal operating period”) was well above average at 18.9%. 

Canon has not only heavily focused its operating strategy on its core competency in imaging innovation, but it has historically identified and attacked underserved or underdeveloped markets through the translation of that competency into new product niches.  The corporation’s first meaningful success was against Xerox (NYSE: XRX), which contained more than 90% of the copying technology market after its significant patents expired in the late 1960s.  Whereas new entrants into the space, including Kodak, IBM, and Pitney Bowes, attempted to face-off against Xerox in a head-to-head battle in its core market, Canon was able to avoid severe competition and gain significant market share by carving out a niche that the expensive Xerox copiers did not serve – affordable, high quality, and reliable copying machines targeted towards small and medium sized businesses with average purchasing power. 

In seeking to further expand operations from this success, Canon directly translated a significant portion of its imaging technology knowledge into different product spaces: point and shoot digital cameras and more advanced DSLR models, multimedia projectors, photo printers, digital camcorders, commercial photo printers, broadcast equipment, and network cameras.  Many of these individual product categories further branch out into individual segments that target specific consumer types with different technology, quality, and pricing points – the spider-webbing effect has created a well-rounded, yet protected, product portfolio that has created a significant competitive moat around the corporation. 

The corporation has retained higher-than-average profitability due to efficiencies gained by the continual capitalization of its prior R&D efforts.  In essence, all core products stem from a common imaging technology point – Canon was able to mold its core competency to attract a diverse group of consumers in a diverse group of markets, characterized by diverse willingness to pay (i.e. base model Canon PowerShot vs. professional level EOS-1D). 

Nike & Athletics Technology

Nike (NYSE: NKE), the quintessential “cross-over” marketer, has transformed one core competency – athletics technology innovation – into a diverse product portfolio that attracts an even more diverse consumer base. 

Nearly 70% and 25% of the corporation’s revenues stem from the sale of footwear and apparel, respectively, and surprisingly, both of the lines, as well as the individual products within each line, contain technology that boils down to several identifiable components.  A large portion of the company’s newest offerings, for example, focus on lightweight, breathable, yet strong materials:

• Pro-Combat Apparel Line: The new line of sports apparel focuses on three key pieces of technology – integrated foam padding for protection during intense training, zoned vents to pull heat off the body and let fresh air in (keeps athletes cool), and lightweight porous materials that absorb sweat and keep athletes warm.  The various components have been integrated into several different product categories including workout tights, fitted long sleeve undershirts, bike shorts, and tank tops.  Likewise, the unique combination of materials within each of these product lines creates several different unique items in each category (several different pairs of shorts, several long sleeve undershirts, etc.).

• “Hyperfuse “Technology: As described by the corporation, the Hyperfuse construction fuses together several different layers of material using a hot-melt process, which creates an unusually sturdy, yet lightweight and breathable, shoe.   The technology has been used in several different shoe lines – i.e. basketball shoes, running shoes, etc.

Whether or not the advertising of the effectiveness of these individual technologies is slightly embellished by the corporation or not, it has translated into a higher level of sales from the same core level of R&D expenditures.  By scaling its R&D efforts – using the same technology to create different product categories – the corporation has the ability to significantly boost its annual add budget without completely destroying its operating cost structure (i.e. SGA as percentage of sales metric).  The Lin-Sanity marketing effect – turning one base idea into something that can attract demand from many different consumer types – has pushed Nike to the top of the athletics apparel industry.

Porsche & Automotive Efficiency

In continuing the parallel, Porsche has become one of the most profitable automakers in the world – historical ROI in excess of 20% – through the use of concepts discussed in the two prior examples.  The automaker’s famed 911 model, which has been in production since 1963, utilizes a “more things to more people” approach.

The independent 911 model is offered with different types of carriages (coupe or cabrio), different drivetrains (rear wheel drive or four wheel drive), and different performance packages (Carrera, Targa, and Turbo, among others) to create a wide portfolio that ranges in price from the low $80,000s to the high $100,000s.  Of course these price points are much more expensive than the average consumer can afford, the spread does cater to different consumers with different willingness to pay – although of a much more wealthy caliber. 

The same cross-over marketing approach is used by other large automakers, including General Motors (NYSE: GM).  Especially when the corporation owned significantly more brands before its 2009 bankruptcy and restructuring, GM produced many different models that all stemmed from similar base products (“platforms”).  The Chevy Trailblazer, except for minor aesthetic differences, was essentially the same vehicle as the Buick Rainier, the GMC Envoy, the Isuzu Ascender, the Oldsmobile Bravado, and the Saab 9-7x.  Likewise, the Chevy Malibu (6^th generation, 2004-2007) was technically equivalent to the Pontiac G6, the Saturn Aura, and the Holden/Opel/Vauxhall Vectra. 

The “more things to more people” approach did save the corporation millions in direct input costs through economies of scale in factory tooling, component parts purchasing, and marketing initiatives, but the overall operating platform did not work extremely well (obviously).  GM’s huge “umbrella-like” structure was way too bulky, the individual vehicles cannibalized each other’s sales, and the positioning of the vehicles did not maximize consumers’ willingness to pay because there was not enough differentiation between each model.  For instance, GMC is generally marketed at a slightly higher price point than the Chevrolet brand, yet there is very limited incentive for a consumer to ante-up for the more expensive product due to a price/value tradeoff that makes little economic sense.  Of course, there were GMC or Chevy “loyalists” that would support each brand, but on the whole the strategy did not act to steal significant market share from the more streamlined Japanese automakers. 

The entire Lin-Sanity craze – if it absolutely must be applied to the business community– is much more about marketing efficiencies than it is about generic buzzwords like “teamwork” and “determination.”

As the marketers of the craze have shown, becoming more to more people – i.e. transforming one base concept into a product/service portfolio that can be marketed to a much more diverse consumer base – is always a much more efficient and profitable way of growing a business.  The concept certainly takes outside-of-the-box thinking, as different wants/needs of different consumer groups makes a universal marketing approach very difficult to implement.  However, the same higher level thinking is almost always rewarded with equally high returns – in this case, the successful exploitation of different consumer groups’ willingness to pay and therefore a higher return on the same level of investment. 

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