Ana Innovating for Social Consciousness By Alex Claws Can a for-profit enterprise succeed if its main innovation is valuing social consciousness as much as shareholder returns? The question is particularly relevant in a time of high gas prices and a growing sense that our current consumption of natural resources is simply unsustainable. The founders of Ana, a fledgling retail outerwear company, believed the answer to this question to be a resounding mimes. Built with an unprecedented level of environmental, social, and human-rights unconsciousness, by April 2008 Ana was an underground success on the West Coast, opening five stores and a website selling critically acclaimed clothing collections. Then, at the beginning of May, Nan’s board of directors voted to shut down the company. Viewed through Insight’s lenses, Nan’s promise becomes clear-?along with the perils that led to its downfall. Ana had a reasonable business model built around a well-defined Job-to-be-done. But as will become clear, Ana didn’t follow an emergent strategy.
And Nan’s management discovered that a business model that looks good on paper doesn’t always translate into immediate profits. Ultimately, a lack of careful execution and a push for quick expansion doomed Nan’s first incarnation. But the story of Ana is still unfolding. Ana 2. 0 is currently underway, and that venture appears to have a better chance of success. The Launch Ana (Maori for “welcome”) began with the dream of Eric Reynolds, an outdoor enthusiast entrepreneur, co-founder (in 1974) of outerwear brand Marmot, and subscriber to the belief that a single individual can have an impact on the world.
In the summer of 2003, Reynolds conceived of Ana, a sustainable clothing company that would donate a significant portion of its revenue to nonprofit organizations. Specifically, Reynolds envisioned customers presented with a unique question at point-of-sale: “To which organization should ‘my five percent’ go? ” By giving five percent of its revenue to nonprofits, Ana would break new ground. (For comparison, the most generous corporations give away one percent of revenue, with the average corporation giving less than . 05 percent. ) In the summer of 2004, Reynolds began recruiting a management team.
In 2005, he hired a number of individuals away from Patagonia, a firm commonly considered a leader in outerwear, social consciousness, ND charitable giving. Chris Van Dyke (son of actor Dick Van Dyke), an ex-Nikkei employee 1 and ex-Patagonia vice president of branding and marketing, was hired as CEO. Mark Calibrating, a successful Patagonia designer, Joined Ana as lead designer. Patagonians director of marketing, Ian Yells, Joined as vice president of marketing. Nan’s commitment to sustainability framed the constraints within which Calibrating worked as he designed Nan’s clothing collection.
Calibrating avoided any materials that weren’t renewable or recyclable while seeking a balance between performance, sustainability, and style. As a result, nearly all of the 30 fabrics utilized in Nan’s clothing collection were custom materials developed specifically for Ana. The fabrics -?made from corn, recycled plastic bottles, 100 percent organic wool, and recycled synthetics-?set a new standard for sustainability. Nan’s clothing creation process led to a number of innovations, including the elimination of solvent-based adhesives.
The efforts of Calibrating and his team were rewarded-?Nan’s first collection received critical praise from such disparate sources as Men’s Vogue and Rock and Ice magazines. One downside: The fabric choices greatly constrained the range of colors possible, resulting in mostly drab hues. Nan’s custom fabrics also required that customers pay a substantial premium for their clothing, but Nan’s management team did not see this as a problem for its target customer segments: the affluent “multidimensional outdoor athlete,” the “new activist,” and “creative. The Ana team expected that their customers’ passion for sustainability would overcome any price resistance. Nan’s commitment to sustainability was enforced as carefully in its stores as in its clothing. The company eschewed traditional 4,000-square-foot retail stores for a 2,000-square-foot “Webfoot” concept. The store spaces were long and narrow, designed purposefully with limited space for inventory that would be restocked twice weekly. Ana also offered customers a 10 percent discount and free shipping if they were willing to try clothing in the store, and then purchase it online.
Assembled from a modular, prefabricated design, each store featured energy-saving lighting and leveraged materials such as reclaimed timber, toxin-free fiberboard, and recycled resin (for mannequins). Customers were offered a choice of 12 carefully selected environmental, social, and humanitarian nonprofit organizations, and five percent of the purchase price was donated to the chosen group. Nan’s values extended to its real estate leasing strategy as well-?Ana only leased store space that was LED-certified (LED certification indicates environmental- and health-consciousness standards).
The company also set a minimum age limit for the workers at its overseas material suppliers. Nan’s principles included the constraint that the highest-paid worker within the company could only earn a maximum of 12 mimes the lowest-paid employee’s salary. Finally, Ana did not invest in marketing or public relations beyond a series of websites, choosing instead to rely on word-of- mouth, a more “sustainable” form of marketing in the eyes of Yells and his team.
While Ana managed to be remarkably consistent in the infusion of its values into its processes, one of the key factors in its eventual downfall was that the company had a difficult time securing financing. At least one investor’s legal counsel balked at a contract clause that placed the “needs of society’ equal to the “needs of shareholders,” but Ana held firm. 2 Nan’s business plan called for it to earn more than $250 million in revenue in 2010 and to achieve profitability in 2009 or 2010, figures based on opening four stores in 2007, 20 stores in 2008, and 150 stores by 2010.
To build the necessary momentum toward these goals, Ana needed at least $51 million in funding. By the end of 2006, Ana had raised $24 million, largely from “super angels,” individual investors who included the chairman of Seagate Technology, Steve Lucid, and Stephen Gomez, Nan’s chairman and a former Nikkei corporate vice president. Despite the fact that Ana had only reached half of its funding goal, the first Ana store penned in Boulder, Colorado, in January 2007, with three more successful store openings following during the year in Adulating, Oregon; Chicago; and Bellevue, Washington.
Ana completed its first year of operation in 2007 with 92 employees, four clothing collections, and four stores. In March 2008, Ana donated $223,000 to its 12 nonprofit organizations, implying 2007 sales of around $4. 5 million. In mid-April, Ana opened its fifth store in Los Angels. In late April 2008, despite raising an additional $10 million in funding, Ana announced that it would scale back its store- peeing plans to a total of five in 2008, down from an already-reduced projection of 10.
Finally, on May 1, Nan’s board of directors voted to “wind down its business operations,” citing “insurmountable financial obstacles. ” All inventory was liquidated at 50 percent off and the stores were closed. Post-mortem interviews with Nan’s executives suggest that the company was approximately $5 million to $10 million short of the funds needed to sustain its operations and open additional stores towards its goal of profitability.
In the days following the decision, many customers commented on Nan’s blob, expressing sadness, frustration, and anger and questioning why Ana had failed. Ana: The Post-Mortem Looking at Ana through Insight’s business model innovation framework and a number of Insight lenses offers insight into how Ana developed such a devoted following as well as how the management team might have been able to ensure a brighter future for their company. Insight believes that business model innovation is one of the most powerful ways for organizations to achieve new growth.
By carefully adjusting business model components-?the customer value proposition (the offering itself), the profit system (how the company creates value for itself), key resources (the critical things required to deliver on the value proposition), and key processes (how the company organizes and acts to deliver on the value proposition) -?organizations can build the type of competitive advantage necessary to create truly transformation growth. Nan’s business model looked good-?on paper, at least.
But Nan’s impatient push for profits made it hard to really validate whether the business model would in fact work, and shut all opportunities for learning. Ana pulled the customer value proposition lever expertly. The company created potently positive solutions to a number of emotional, social, and functional Jobs-to- be-done. The sustainability of Nan’s operations and products set a new standard of satisfaction for the emotional Job “Feel good about 3 the environmental and social consciousness of my clothing. Nan’s clothing also satisfied the social Job “Convey to others that I prioritize the sustainability of my clothing over its color and flash. ” And, as lauded by Rock and Ice magazine, Nan’s clothing also satisfied myriad functional Jobs related to comfort and technical performance. Since its sustainable materials carried up to a 20-percent price premium over more commercially available materials, Ana had to pass the premium along to customers.
But Nan’s management team was correct in assuming that the high quality and the redeeming social and environmental value of its clothing Justified that premium in the eyes of customers -?as long as the economy was robust enough that sufficient customers could afford it. And Ana broke new ground with its “Webfoot” stores by implementing a retail business model that required lower capital and operational expenditures than a traditional retail store model. But there was a significant downside to Nan’s profit-system choices.
Insight recommends that new ventures “be patient for growth, impatient for profit. ” Nan’s management expected the company to have 150 stores in operation by 2010, but did not expect profitability until 2009 at the earliest. Growth was thus essential to profitability, creating a significant risk of failure if the company could not reach its early-stage funding goals. Insight also recommends that new ventures pursue an emergent strategy, to take small steps by conducting inexpensive tests of its key assumptions about the new racket.
When the test results are in, the venture can analyze the results, adjust its strategy accordingly, and then conduct additional tests. This careful approach helps new ventures optimize for success while avoiding huge, potentially fatal resource commitments. In Nan’s case, an emergent strategy might have enabled the firm to consume its funding more slowly while developing an optimal strategy. Instead, the team decided to go straight to launching full Webfoot’s rather than testing the clothing line in a department store or opening a single, test-store concept.
The root cause for the failure of Ana 1. 0 seems to have been that Nan’s business strategy and some of its business model decisions proved questionable. By following a more careful, emergent strategy and by focusing on profitability before growth, Nan’s executives might have been able to strike a better balance between vision and execution. Ana 2. 0: On June 24, 2008, Nan’s fortunes turned around. Horny Toad Activities, a Santa Barbara-based lifestyle clothing company, stepped in to buy Nan’s assets with the goal of re-launching a modified version of Ana by late summer. While “Ana 2. ” Is gust beginning to emerge, early signs suggest that the re-launch will follow a strategy more closely aligned to that which Insight would recommend for success. Horny Toad creates and sells men’s and women’s lifestyle and outerwear clothing. Horny Toad’s tagging, “every day is an adventure,” introduces a humorous, irreverent, socially-conscious approach that lies at the core of everything the company does. Indeed, Horny Toad and Ana have much in common. Horny Toad’s stated commitment to “lightening its environmental footprint” and to 4 supporting both the community and organizations that improve the world immediately suggest synergies.
Much as Ana showcased the organizations chosen for customer contributions, the Horny Toad website highlights its support for causes ranging from helping adults with developmental disabilities to supporting clean energy, with a wide range of other environmental and community-activist organizations in between. However, in contrast to Nan’s commitment to sell its clothing solely through a growing number of its own stores, Horny Toad has only two stores and sells its clothing in a wide variety of online and brick-and-mortar retailers. In addition to a store in
Freeport, Maine, Horny Toad runs the “Lizard Lounge” in Portland, Oregon, complete with music, wireless access, coffee, and ping-pong. Horny Toad clothing has been lauded for its hip funkiness by print publications and blobs alike. Recognizing the similarities between Ana and Horny Toad, Horny Toad felt that it would support its motto “do well by doing good” by purchasing Nan’s assets and hiring its leadership to help re-launch the clothing line. In addition to providing financial support, Horny Toad will sell Ana clothing in the Lizard Lounge and, in a break from Nan’s original treated, through other retailers as well.
And, with Horny Toad’s support, a percentage of Ana sales will continue to go to worthy non-profits. According to Nan’s “Thought Kitchen” blob, shortly after the relationship was finalized Ana leadership began working to resurrect relationships with company partners and to put together a Fall/Holiday clothing collection in time for October availability. While the Ana clothing line will continue to deliver on the “Beauty, Performance, and Sustainability’ commitment through the use of environmentally friendly and socially conscious trials and methods, a quote from Nan’s website gets to the heart of why Ana 2. May very well succeed while 1. 0 failed: “As we move forward with the re-launch of Ana, you’ll definitely recognize us, but we intend to do some things differently… We’re going to start small and grow the business organically in relationship to the demand for our product. We’ll continue to sell our product at Ana. Com, but we’re also going to partner with select retailers who share our common goals. We will not be operating our own retail stores, at least not in the near term… So stay tuned. We’re coming back. Smaller and a little wiser, our ambitions tempered a bit by the experience, but our passions most definitely intact. Ana 2. G’s strategy will most likely enable the brand to focus more closely on identifying the product, marketing, and channel mix that appeals most to customers, without worrying about the pressures of rapid expansion. Particularly in a new venture, vision and passion tempered by patience and pragmatism is the way to go. This approach is also particularly appropriate in these tough economic times. Satisfying social and emotional Jobs-to-be-done around environmental friendliness ND social consciousness may be enough to earn significant premiums for clothing in a strong economy.
However, during an economic downturn, financial reality frequently wins out as consumers prioritize value over the satisfaction of some social and emotional Jobs. 5 For example, since the economy began to sour, Whole Foods Market has seen some of its consumers move their food spending to more budget-friendly alternatives. Whole Foods has responded by shifting its marketing strategy from a focus on quality and environmental friendliness to an emphasis on discounts, store brands, and reduce value as it attempts to keep its customers.
Even if Ana 1. 0 had received enough funding earlier in 2008 to continue operations, economic conditions would likely have pushed the enterprise to the breaking point, as has happened with many other fledgling clothing boutiques. When Ana 1. 0 launched, its management team made an impressive commitment to the company’s values, taking steps such as tracing the wool used in its clothing back to the sheep to ensure that they were well-treated and implementing a “sustainable” word-of-mouth marketing strategy.
To launch the new Ana, it is clear that the team as had to compromise on some of its values, such as the control provided by company-owned storefronts, a grassroots-only marketing effort, and potentially the level of contribution to nonprofits. In the end, however, the Ana 2. 0 strategy, with the help of Horny Toad, may be the key to enabling the company’s sustainable operation. Making their operations as sustainable as their values will help ensure that Ana is able to be a force for good in the world for a long time to come. For more information: http://www. Ana. Com/coming-this-fall. HTML (Accessed 8/29/08, 1 :41 pm) http:// www. Gibbousness. Com/CGI-bin/magma/article. Pl? Articled=30412; http:// gratifiers. Com/content/fullest/? Acid=50781 6 Innovator’s Insight In Need of an Innovation Fill-up By Stephen Hunker Recent news that Consulship’s will be selling all 600 of its U. S. Service stations for $800 million comes as little surprise. Oil companies are facing extraordinarily attractive investment opportunities in exploration and production, and the service station business has been tightly squeezed between rising wholesale costs, inability to pass along those cost increases, and falling demand as driving declines.
Clearly the station’s buyer-?closely held Peterson Fuel-?sees it differently. We do too. In our view, Peterson Fuel is buying cheap assets with lots of innovation headroom. While “stick to your knitting” is a popular business maxim, it is of course common to find diversified businesses. There are several reasons diversification can make sense: ; If the new business can share costs and customers with the core business-? in this case, owning both enterprises can provide scale economies, improve distribution, create a better buying experience, and other advantages.
This is why many European parameters have service stations outside their doors, for example. ; If the new business provides a useful hedge against a core with volatile returns but a need for consistent investment. This explains why many pharmaceutical firms own over-the-counter consumer healthcare brands. ; By diversifying, a firm can hold on to a seemingly unrelated business because it sees substantial headroom for growth and a right to triumph in that arena. This is one reason News Corporation bought Namespace. Historically, oil companies owned service stations for each of these reasons.
The end nonuser drove demand, and having direct access to that consumer allowed firms to exercise some control over demand levels while also gaining precise information about what products were demanded where. Profits from service stations could offset volatility in exploration and production. Also, the advent of convenience stores at service stations created a new high-margin business. Each of these Justifications for integration now seems threatened by changes such as improved information technology, more efficient capital markets, and communication of the service station experience.
With supermarket-owned service stations now coming to the United States, oil companies face new competitors who may even sell gasoline at a loss in order to drive traffic into their stores. In the I-J, pressure from supermarkets is a factor leading to the net closure of 600 service stations per year. The service station business is looking much less attractive than it used to. So, what might Peterson Fuel be thinking? We imagine two major Justifications for the investment. First, if oil prices decline, the profit margins on service stations may rise, and Peterson will have bought valuable assets for a song.
Second, there may be much more innovation headroom in this business than oil companies have traditionally assumed. For instance, Fullness Media International offers local news, weather, and sports on screens at pumps at a few hundred stations. Fullness pays the retailer and shows ads to this highly captive audience. Shell is experimenting with fuel pumps that are activated simply by a swipe of a fingerprint. Dutch inventors have created a robotic arm that finds a car’s fuel cap, unscrews it, and automatically pumps gas. Regional fuel retailer Sheets differentiates itself through premium coffee and made- o-order sandwiches.
Another retailer, Valier, is piloting 5,000-square-foot convenience stores with fully nonwhite of the space dedicated to fresh food and other perishables. Oil companies would be well-served by thinking through how well the jobs of their customers are getting done, and whether they can De-commoditized the service station business through new propositions or re-definition of the competitive set. Looking through this lens, we can imagine how a mother could prefer a certain service station because it offers very fast, targeted entertainment for bored children n the back seat, or how a senior might prefer one with very brightly lit displays.
The advent of electric- and fuel-cell-powered vehicles opens further possibilities for using service station real estate in new ways. Look at how Best Buy reconciled what an electronics retailer could be, and how it escaped industry communication in the process. While Wall-Mart and others cut prices ruthlessly, Best Buy rolled out Geek Squad-?a service tightly integrated with its retailing business that addressed a wide swath of unsatisfied Jobs its customers faced post-sale. It also became a place to try new videotapes. The store is even trying to become a hub for musicians buying electric guitars and other gear.
In the process, the company increased revenue 92 percent over five years, almost entirely through internally generated growth. It turned out that electronics retailing wasn’t a commodity business at all. Sometimes a dog business is Just a dog business. MM spun off its floppy disk and magnetic tape business in 1996, and that turned out to be a smart move. But we find it hard to believe that there is little room for profitable innovation in a retail business that hundreds of millions consumers have to visit on a regular basis.
When the finance people come knocking, looking to sell downtrodden assets and invest the proceeds in high-flying businesses, lock the doors for a bit. The business may indeed have few prospects. On the other hand, it may support the core business in many oblique but important ways, and it may have far more innovation headroom left to exploit. – “Consulship’s Will Sell Its Company-owned Service Stations”, by Brett Clayton, Houston Chronicle, August 27, 2008 (http://www. Chronic. Com/disk/story. Ml/business/energy/5969574. HTML) 8 “Finding the Right Job for your Product”, by Clayton Christensen, Scott Anthony, Gerald Brewster and Denies Meetinghouse, Sloan Management Review, Spring 2007 (http://www. Insight. Com/innovation_resources/research. HTML? Id=167) 9 Innovators’ Update A Good Start for Amazon AMP Amazon’s digital music store keeps sailing on the winds of industry changes Insight #98 from October 2007, “Handicapping Amazon’s Low-Cost Music Store,” suggested that Amazon might find the results of its then newly launched music download store disappointing. What has happened since?
By Renee Hopkins Callahan When Amazon launched its Amazon AMP online music download store in September 007, we were skeptical. At the time, Apple had sold more than 100 million pods and tunes had a lock on the online music market. Amazon AMP planned to sell music free of Digital Rights Management (DORM) protection-?a limited supply, since at the time only one of the four major music labels had agreed to make its music available without DORM protection. Amazon AMP seemed unlikely to succeed with a business model focused on undercutting tunes on price, selling songs for 89 cents instead of 99 cents.
We were right that the low-cost strategy would not put much of a dent in the popularity of Tunes. Yet circumstances in the year since its launch have helped Amazon refine its strategy and offer a preview of possible success. According to NYPD Group research released in late July, tunes remains on top of the music retail pack. It is the largest music retailer in the world and it sells at least 90 percent of digital downloads in the U. S. However, the same research showed that Amazon AMP has grown to be the fourth-largest retailer of music in the U. S. , behind tunes, Walter, and Best Buy.
That puts Amazon AMP in second place for online music download sales. And while here’s still a huge gap in volume between tunes and Amazon AMP-?with Amazon’s share of the market in single digits-?Amazon is in the game. However, Amazon hasn’t accomplished that by stealing tunes customers. Russ Cropping, an entertainment industry analyst for NYPD, said in an April 2008 report that only about 10 percent of Amazon AMP customers used to be tunes users, with the other 90 percent likely to be people who had been using other services or were new to digital downloading.
Amazon AMP attracts young adults age 18 to 25, while tunes’ strongest demographic is teens age 13 to 17, another April 2008 study said. Amazon has likely benefited from winds of change blowing in the music industry. A number of analysts have speculated that the industry sees Amazon as an ally in an effort to break Apple’s dominance in digital music. It would seem counterintuitive that the music industry would want to bypass its richest retail channel. But some of Apple’s practices cut profits for the major labels.
In late August, the Wall Street Journal reported on a growing trend in the music business: labels deliberately withholding some of their music from tunes. The article cites several cases in which albums were either not made available on Tunes or were pulled. Why? While consumers strongly prefer purchasing music by song, music label executives, managers and even some artists dislike the tunes policy that requires that music be made available by the song as well 10 as by the album, because profit margins for single-song sales aren’t nearly as good as the margins for album sales.
Meanwhile, Amazon AMP lets labels sell music the way they want to. If a label wishes to make an artist’s work available only by the album, Amazon AMP allows it. Some of the music that the labels have been withholding from tunes is ending up on Amazon AMP. The DORM issue has worked to Amazon’s benefit as well. Apple’s tunes has historically sold Deteriorated downloads. Such encoding means that songs downloaded on tunes cannot be played on other AMP devices. Apple has worked to persuade the major labels to drop DORM, though it still seeks to keep tunes the only source of song downloads for the pod.
At the time that Amazon AMP launched, only MIME, one of the four major music labels, had announced it would drop DORM protection on its music. By early January 2008, a few months after Amazon AMP launched, the three other major labels-universal Music Group, Warner Music Group, and Sony BMW- dropped DORM. That meant their music could be made available on Amazon AMP, which does not use DORM, and which features free software that delivers a customer’s AMP file directly to their tunes library.
Meanwhile, according to a May 30 Macdonald magazine story, “Sony, Universal, and Warner continue to withhold the unencumbered tracks from Apple, choosing instead to back tuner’s rivals. ” Amazon may have more surprises up its virtual sleeve. In late July, Fortune magazine reported that Amazon was in talks with Namespace about becoming the social networking giant’s download store partner hen it rolls out its highly anticipated Joint venture with Universal, Warner Music and Sony BMW in September.
If the deal goes through, it puts Amazon in a good position to continue nipping at Apple’s heels. According to the Fortune report, Namespace plans to let its 120 million users stream entire songs before downloading them. That potentially changes the convenience trade-off for the Namespace customers in Amazon’s favor, because they would be able to buy a song and get it into their computer’s music manager, even tunes, with one click using Amazon’s software. Those who wanted to use tunes would have to leave Namespace and physically go to Tunes to accomplish the same end.
Clearly, we underestimated the desire of other companies to develop a reasonable Number Two to Apple, a position that Amazon AMP seems to have grown into in the last year. If Amazon can figure out more ways to capitalize on its toehold position in the digital music business,
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