The Law Of Division

I noticed recently that soda has lost its fizz. For the first time in decades, volume has declined in 2005 and even more in 2006. Consumer demand for bottled water, sports drinks and energy drinks is exploding, and contributing to eroding sales. Even milk did better than soda, with volume slightly up in 2005.

What's going on here? Well, dear reader, the law of division has struck again. To those of you who haven't read about the 10th Immutable Law in my book The 22 Immutable Laws of Marketing, it goes like this: 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 and 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% of the viewing audience. Now, we have network, independent, cable, pay and public television, even online television.

Beer started the same way. Today, we have imported and domestic beer. Premium and popular priced beer. Light, draft and dry beer. 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, around 200 countries are generally recognized as sovereign nations. Coming soon: Iraq in three parts.

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.

Instead of understanding this concept of division, many corporate leaders hold the naive belief that categories are combining. "Convergence," "synergy" and its kissing cousin "the corporate alliance" are the buzzwords in the boardrooms of America. Some years ago, The New York Times wrote that IBM is poised "to take advantage of the coming convergence of whole industries, including television, music, publishing and computing."

It didn't happen. Categories are dividing, not combining.

Look at the much-touted category a while back called "financial services." In the future, according to the press at the time, we wouldn't have banks, insurance companies, stockbrokers or mortgage lenders. We'd have financial services companies. It never happened.

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.

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% of the imported-car market in the U.S. at its peak.

Volkswagen was so successful that it began to think it could be like GM and sell bigger, faster and sportier cars. So it swept up whatever models it was making in Germany and shipped them all to the U.S. But unlike GM, it used the same brand, Volkswagen, for all its models. 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 U.S. and started selling a new family of big, fast, expensive Volkswagens. Now, you had 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% share has shrunk to less than 6%. Eventually, VW brought back the Beetle, but the damage had been done.

What keeps leaders from launching a different brand to cover a new category is the fear of what will happen to their existing brands. GM 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 upmarket with the $54,000 Allante. It bombed. Why would people 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 GM might have been to put a new brand into the Mercedes market. (It might have brought back the classic LaSalle brand.)

Timing is also important. You can be too early to exploit a new category. Back in the '50s, 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.