A business case that every mining executive should know

THIS week Allan Trench shares one of his favourite business case studies – that of the rise and fall of the iconic knowledge brand Encyclopaedia Britannica – and suggests there are lessons in the case for all mining information providers, if not all mining company executives.
A business case that every mining executive should know A business case that every mining executive should know A business case that every mining executive should know A business case that every mining executive should know A business case that every mining executive should know

 

Staff Reporter

In 1768, three Scottish printers began publishing an integrated compendium of knowledge – the earliest and most famous encyclopedia in the English-speaking world. They called it Encyclopaedia Brittanica1. From humble beginnings, Britannica evolved through multiple editions and became regarded as the world’s most prestigious, comprehensive and authoritative encyclopedia.

In 1920, Sears, an American mail order retailer, acquired Britannica and moved its headquarters to Chicago. Ownership passed to William Benton in 1941 – who then willed the company in the early 1970s to the Benton Foundation, a charitable organisation.

Britannica grew under its American owners into a serious commercial enterprise while sustaining its reputation as the world’s “most prestigious and comprehensive” encyclopedia.

Brand extensions, such as atlases and yearbooks were added. The company built one of the most aggressive and successful direct sales forces in the world.

By 1990, sales of Britannica’s multivolume sets had reached an all-time peak. Dominant market share, steady if unspectacular growth, generous margins and a 200-year history all testified to an extraordinarily compelling and stable brand. Within the next decade, however, sales of Britannica and all encyclopedias in the US fell over 80%. Britannica was blown away by the rise of the now humble CD-ROM.

Whereas Britannica was pitched at prices between $1500-2200 per set (depending on the quality of the binding), CD-ROM encyclopedias such as Encarta cost only around 5% of those amounts. But many buyers did not pay even that. With a marginal production cost of $1.50 per copy, Encarta was often “sold’’ as a freebie with computer-printer packages. The marginal cost of Encyclopedia Britannica was $250, and that was before typical salesman commissions of $500-600.

In Encarta, Microsoft had licensed the text for its encyclopedia from a third-rate, nearly defunct product, surviving as a periodic promotional item in the aisles of supermarkets, with a brand perceived as so pathetic that Microsoft dropped its old name. The addition of public domain illustrations and scratchy sound recordings too old to bear a copyright (and therefore available at no cost) hardly made for a serious rival to the Britannica – or so it seemed.

As revenues plunged, it became obvious that whether they ought to be or not, CD-ROM encyclopedias were serious competition. Britannica executives reluctantly considered creating their own CD product, only to encounter a technology constraint: the content of Britannica was too big.

Encarta, with its 7 million words, could fit easily on to a CD-ROM, with plenty of room for illustrations and interactivity. Britannica, however, had more than 40 million words. It was impossible to create an interactive version within the capacity limits of a CD-ROM. The technology was not ready, so the company’s executives decided to wait.

Months passed. Sales continued to plummet. In response, the company put together a text-only CD version of Britannica, only to encounter another crisis: a revolt by the sales force.

Even if priced at a significant premium over Encarta, a CD version of Britannica could not possibly generate the $500-600 sales commission of the printed product, from which it would so obviously take sales. Indeed, a CD product would have to be sold through a completely different channel.

To avert a revolt by the sales force, Britannica executives decided to bundle the CD as a bonus for buyers of the multivolume set. Anyone who wanted to buy the CD alone would have to pay $1000.

This decision appeased the sales force briefly, but did nothing to stem the continuing collapse of sales. Losses mounted. Finally in 1995 the company was put up for sale. For nearly 18 months investment bankers tried to find a buyer. Microsoft said no. Technology, media and information companies all declined. Finally in 1996 the company sold at less than half book value.

The decline and fall of Encyclopedia Britannica is more than a parable about the dangers of complacency. It illustrates the new economics of information: how the evolving technological capabilities for sharing and using information can transform business definitions, industry definitions and competitive advantage.

The Britannica story contains morals for all businesses – but particularly for information providers, whether to mining or other industries.

The first implication is obvious: the most venerable can prove the most vulnerable. New information technologies can come from nowhere and demolish brands and businesses that have been established for decades. One of the greatest brand names in the English-speaking world was nearly destroyed, in just five years, by a cheap shiny disc.

The second point is a bit less obvious: the history, myths, shared values, and presuppositions that define a strong corporate culture can blind business leaders to events that do not fit into their collective mental framework.

Britannica’s executives initially scoffed at Encarta because its content was based on a promotional item sold in supermarkets. But their own market research told them that the typical encyclopedia is opened less than once a year, once the initial pride in ownership fades.

Their own sales people knew full well that the way to sell an encyclopedia is to play on anxieties: parents trying to “do something” for their kids. The fact that the kid never uses the product is beside the point – parental guilt has been assuaged. But today, when parents are anxious about their children’s performance in school, when they feel guilty about not doing enough to help, they buy a computer.

The new PC may never be used for anything other than chat rooms and video games, but parental guilt has again been duly salved. It just so happens that a computer costs about the same as Britannica – and along with the computer is a CD-drive and promotional free copy of Encarta.

In other words, the fundamental value proposition in this example is assuaging parental guilt, and hence the competitor is actually the PC rather than Encarta.

Supermarket brands and intellectual content have precious little to do with it. But within the mindset of executives in the business, steeped in a culture of scholarly values and self-confident from past successes, it is extraordinarily hard to understand early enough that conventional industry definitions are obsolete.

There is a third lesson: even if the executives of established businesses fully grasp the impact of new technologies, and even if they can reason their way beyond their corporate myths and assumptions, they still face a massive competitive disadvantage arising precisely because they are incumbents. Incumbents are saddled with legacy assets, not just clunky mainframe systems, but with deadwood sales and distribution systems, bricks and mortar, brands and core competencies.

Competing in the face of the new economics of information requires cannibalising those assets, perhaps even destroying them.

Incumbents hesitate to do that, especially as long as the business has positive margins. Rather they do complex financial calculations and get bogged down in internal political debates.

Insurgents have no such inhibitions. Britannica’s sales force had been built over decades. It was a foundation of competitive advantage and the envy of the industry. Yet it was also obsolete. An aggressive strategy for the new medium would have required blowing it up. The company hesitated. Microsoft had no reason to hesitate.

So to reiterate – Lesson 1: No business is safe – at anytime – and in particular long-time incumbents (Anaconda Copper springs to mind at this point).

Lesson 2: Your greatest strengths as a business can actually become your greatest weaknesses over time – that is, every competitive advantage has a shelf-life.

Finally lesson 3: A continually changing business landscape requires that you act quickly to change your business when needs must. For Britannica it meant losing their high-cost sales force – but the management were not up to it.

For you it may mean changing commodities, changing countries, focusing on new technologies – or perhaps even moving a few deck chairs in the executive suite and-or the boardroom.

1 With due acknowledgement to the Boston Consulting Group, which first told the tale of Encyclopaedia Britannica in their best selling book “Blown to Bits” by Philip Evans and Thomas Wurster, Harvard Business School Press. ISBN 0-87584-877-X.

Allan Trench is Adjunct Professor of Mine Management & Mineral Economics, Western Australian School of Mines and is a Non-Executive Director of Pioneer Nickel, Navigator Resources and Enterprise Metals. He also leads the copper analysis team at CRU Group, a most “prestigious and comprehensive” global mining and metals consultancy.

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