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Don’t Be A Chicken Little: Rosetta Stone Knows The Sky Isn’t Falling

The market has fallen two weeks in a row and the analysts are already running around like Chicken Little. While it is so tempting to get caught up in these daily dramas, it is also short-sighted.

The market has fallen two weeks in a row and the analysts are already running around like Chicken Little. While it is so tempting to get caught up in these daily dramas, it is also short-sighted.

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Consider, for example, the case of Rosetta Stone (RST). This innovative
language software company issued one of the hottest IPOs of 2009. It was the
darling of Wall Street. It was going to revolutionize language learning and was
even credited with helping to reverse the downward momentum of equities in this
“great recession” year.

And then Rosetta Stone reported a second quarter
loss of $7.3 million, or 42 cents per share, compared with a profit of $3.4
million, or 20 cents per share, for the same quarter the year before. Suddenly,
many stock watchers are ringing bells. “Rosetta Stone is under pressure,” they
say.

But I had a chance to conduct an extensive
interview with the company’s CEO, Tom Adams,
and then I dug a bit deeper. What I found was the fingerprint of a thriving
company, one that is making strategic choices others ignore. If you step above
the quarterly noise and instead analyze the company’s long-term strategic
fundamentals, you will see several strategic patterns underpinning the
company’s story.

Over the next week or so I will share these
patterns and unique choices which have led to success before and may prove potent
yet again.

Pattern #22:
Move Early to the Next Battleground
 

As I’ve mentioned here before, highly
competitive companies seem to consistently orient themselves to the next
battleground, while their peers remain entranced with the immediate turf war. RST’s
core strategy begins with such a commitment.

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When Tom took the company’s helm in 2003, the
firm was selling language software in a crowded field of other similarly priced
books, tapes, and CDs. The team’s “big insight” was that by approximating the competitors’ pricing
they were mis-categorizing their offering.

All language materials were selling for
between $5 and $30. And RST, following standard business school logic, had
decided to sell the first unit of their product for $20, nicely in the middle of
the field.

But RST’s product was entirely different. It
was not designed to replace the classroom learning experience. Instead “we
compared ourselves to the immersive experience of going to a foreign
country, not being able to speak the language, and learning it there,” says
Tom.

RST’s management realized that if they wanted
to really own the immersion positioning, they should be selling their product
at a far higher price. “We were thinking in terms of category,” Tom explains,
and so it became obvious that they needed to sell the experience not for $20 or
even $100. They immediately repackaged the product (bundling multiple $20
modules) and sold it for $300.

“Price is a proxy for quality,” says Tom.
“When you make a promise that people will learn and you charge $300, then you
really must deliver.”

Today’s language tools are battling to
replace the classroom learning experience. But the battleground of the future
is to apply technology to replace the experience of immersion, and RST crafted
its lesson around that premise. By choosing the next battleground early, RST
was able to break away from the current competitive field.

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Choosing the next battleground or “category”
may seem superficial. But this tactic explains the success of numerous
breakthrough companies such as Gatorade,
which was the first to move to the sports-drink category. The key to building a
long-term advantage with this strategy, however, is to weave together this
positioning with a long list of interlocking strategic decisions. This way you
raise your competitors’ costs of copying you.

“Choose your competitors wisely, for they
will define you,” says Tom.

Last month RST launched a new product called “Totale.” It is a combination of
the Rosetta Stone core product (a series of interactive computer lessons) with
two new services bolted on: a web-based, video coaching session with a live
tutor and online game room in which customers can play language games with
other RST users.

But Totale has the potential to be
much more because it moves RST yet deeper into the next battleground. How so?
Well, to start, Totale is
entirely online. It requires no CD or heavy program to install. As such, it
steps RST into the software-as-service field, or “cloud computing” as
many call it. If the world is moving into one in which we no longer need disk
drives or large hard drives because we access our applications through web
browsers, as Google and increasingly Microsoft believe, then RST is already
there.

Ask yourself
the questions below to see how you can create a new category or find a new
battleground to give your business a competitive advantage that you can build
upon.

1.      Where do I
see my industry going?

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2.      What
customer needs are not being met?

3.      How can I
offer a new product or service that my competitors don’t expect?

 

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About the author

Author of Outthink the Competition business strategy keynote speaker and CEO of Outthinker, a strategic innovation firm, Kaihan Krippendorff teaches executives, managers and business owners how to seize opportunities others ignore, unlock innovation, and build strategic thinking skills. Companies such as Microsoft, Citigroup, and Johnson & Johnson have successfully implemented Kaihan’s approach because their executive leadership sees the value of his innovative technique.

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