Volume 180: Quantitative Destruction.
Quantitative Destruction.
tl;dr: Nike, Starbucks; value destroyers.
The first time I experienced the myopic arrogance of the quantitatively minded was while doing my MBA. I shared an apartment with a PhD student who’d built a predictive quantitative model of the Turkish economy. When this economy crashed, she quite literally refused to believe it was happening…because her model hadn’t predicted it.
Fast-forward many years, and I was introduced to the new CEO of a creative consulting business who’d previously been at Deloitte Digital in Australia and was looking for a strategy lead. Over lunch, he shared his vision by telling a story about F1 racing. Specifically, how they used sensors to measure thousands of data points per second, beaming everything back to HQ, enabling real-time optimization of the car for the conditions.
The implication was clear; he envisaged a future where every client decision would be data-optimized.
My problem was that F1 is as close to a simple, closed system as possible. The track is set, the car is understood, each competitor has to operate under the same FIA rules, the weather conditions can be plotted, and millions upon millions has been invested in measuring, well, everything within the confines of the driver, track, and car.
Meanwhile, customer markets are the opposite. They’re complex, open, unpredictable, and often include many non-measurable or very difficult-to-measure elements, especially by a creative consulting firm with limited resources operating across multiple categories. The idea that we could build some kind of perfectly optimizable quantitative engine if only we had enough data felt dangerously naive to me. Data is great, but trying to pretend an open system is closed is a fool’s errand. It was clear that this job wasn’t for me.
However, as the years have passed, we’ve seen corporate boards increasingly elevate the myopically quantitative to top leadership roles at some of the world’s best-known corporations, often with disastrous, value-destructive consequences.
I’ll get to what’s happening at Nike (stock price down 34% this year) and Starbucks (down 25% this year) in a second, but first, I want to discuss the nature of quantitative myopia among such leaders and why it can be so dangerous.
Without wishing to tar everyone with the same brush and acknowledging that this is a broad overgeneralization, I’ve noticed certain shared patterns among quantitatively minded leaders, irrespective of their background (in other words, this seems to hold true across finance, engineering, computer science, and more).
Put simply; such leaders tend to lack empathy for other human beings, especially the customer, measure everything at its most rational level, revel in tiny statistical differences, elevate efficiency above all, seek to boil complex, open reality down into closed, simplistic, quantitative models, and ignore very hard or impossible-to-measure qualitative information, also known as qualia, completely. They also have a worrying tendency to denigrate the professional expertise and experience of people who don’t share their same quantitative perspective on the world.
In other words, there’s often a dangerous and arrogant myopia that ignores complex reality while focusing intently on a simplistic, quantitatively measurable model, which they believe represents everything that matters.
With that in mind, let’s take a quick look at Nike, which finds itself in quite considerable trouble.
If we borrow from this compelling perspective from a long-tenured former Nike executive, we can quite clearly see a series of easily avoidable strategic blunders:
Over-indexing on DTC distribution based on pandemic-era growth rates from a low base, assuming such growth will continue in perpetuity
Chaotically removing itself from the wholesale environment, reducing the surface area of the Nike brand, making it harder for consumers to buy, and opening up retail distribution opportunities for competing brands such as On and Hoka.
Eliminating long-tenured category leaders in pursuit of a data-driven approach to innovation and, in the process, missing out on trends such as the recent growth in running.
Over-indexing on margin-killing price-promotion-focused digital “performance” advertising that’s data enabled and trackable at the expense of broad-reach brand marketing, which is not.
All of this smacks of myopic quantitative arrogance. Instead of understanding the strengths of the Nike franchise, its control of retail distribution, and its dominant leadership positions across categories established over years, it appears that Nike’s new CEO attempted to force an open system to become closed. He wanted to massively grow its direct sales relationships with customers, mediated digitally, cutting out the ‘middleman’ of retail, which would then provide a front-to-back ‘flywheel’ of data and increased margin upon which Nike could out-innovate the competition, thus spinning the flywheel ever faster toward tech-like valuation multiples…
The only problem? This isn’t how people buy; it’s not how competitive markets work; it’s not how brand strength is leveraged, and, as a result, the whole thing has become a value-destructive debacle for investors as margins have declined, inventory has piled up, and Nike has slipped from innovation leadership across multiple categories toward follower status. And the competition isn’t standing still. Adidas recently announced that it’s significantly increasing advertising spend. It’s no coincidence that this is occurring at exactly the same time as the pickle Nike now finds itself in.
As a comparison, let's also consider Starbucks, another well-known corporation with relatively new and deeply quantitatively driven leadership that appears to be stuck in a very similar ‘data-driven’ doom loop.
Without getting too deep into it, an existential battle is being waged between founder and former CEO Howard Schultz and new CEO Laxman Narasimhan. If I were to boil this down, Schultz believes the secret to Starbucks’s return from the abyss lies in a “maniacal focus on the customer experience,” where “the answer does not lie in data, but in the stores.” He believes that Starbucks needs to re-commit to and reinvigorate the third place in order for it to get its mojo back. Meanwhile, Narasimhan has a very different strategy in play - data-driven sweating of the assets. He sees the future of Starbucks as a closed loop where we order on our phones and pick up our drinks or food of choice without spending much, if any, time in the store itself, thus maximizing efficiency and store productivity and, again, creating a flywheel of success. But, thinking as a customer, this is why your local Starbucks is more likely to be a tatty, unkempt mess where the baristas are more focused on filling remote orders than a place you’d like to spend time, not to mention the god-awful state of the bathrooms.
As a result, Starbucks is now experiencing the easily foreseeable problem of such a strategy reducing occasional buyers, which, to their credit, the Magical Marketing Scientists of Hogwarts, Sorry, of The Ehrenberg Bass Institute, devote considerable attention to warning us about.
Again, there appears to be a desire to force an open system to be closed, to maximize efficiency, and to forcibly shift people from one behavior - enjoying the third place - toward another - grab and go, without materially considering the broader competitive environment, the considerable rise in small cafes with better coffee, or the fact that qualitative factors like a superior store experience directly translate into quality signals like how much we’re willing to pay, or whether we even want to be there in the first place.
Contrast both of the above with Apple, which, uniquely among its big-tech peers, has long understood that the qualitative experience customers receive is a massive signal of quality that directly translates into product desirability, and the price customers are willing to pay. As a result, although not the lone reason, the Apple Store is a big reason consumers are willing to pay considerably more for Apple products than competing smartphones and laptops from other manufacturers. Because, put simply, it feels better.
I’ve often stated that the narrative that marketers need to become much more fluent in finance needs to be flipped. If you’re a finance professional focused on applying the scarce resources of the firm toward value-additive actions, then it's incumbent upon you to know how value-additive actions like marketing work.
However, in light of these disastrous leadership shifts being made by boards that seem to have little or no understanding of marketing, I should really shift this. Instead, I should state that it’s critical for quantitative-minded leaders to expand their horizons in order to better understand how things like marketing, experience, and branding work, especially through the qualitative lens of their customers' experience. To get past their myopia, park the quantitative arrogance and fundamentally establish empathy for the people they serve.
For, it is becoming abundantly clear that marketers who aren’t quantitative enough are nowhere near as value-destructive as CEOs who willfully ignore the qualitative reality of the businesses they lead.