Expanding and transforming competence sets

Since his childhood, C. H. Wu, the founder of 85°C Bakery Café, has had a strong pattern planted in his mind: “profit can be made only from self-employment.”

When there was an unfavorable deviation between Wu’s ideal goal (making lots of money) and the current state (still being penniless), this pattern prompted him to search for new opportunities. It created a charge structure which made him brainstorm

about the kinds of services or products that would meet consumer demands. When he finalized coffee and cakes as his main product line, Wu knew (from his past experience of running the pizza shop 50 Bucks Hot) that his cakes must be made by professionals that he could count on. Therefore, he sought out former Agora Garden (亞太會館) dessert chef C. L. Cheng (鄭吉隆). Cheng, who was teaching school at the time, declined Wu’s call to join his venture in opening a new business.

Unperturbed, Wu repeatedly traveled from Taichung to Cheng’s home in northeastern Wanli (萬里) to convey his management concepts, philosophy, and execution plan.

After seven visits, Wu finally got the big chef to take on the major task of managing the baking and pastry sector of 85°C Bakery Café (黃亞琪, 2006).

From the point of view of competence set expansion, Wu knew that the specialized skills of the F&B industry was the missing piece of the jigsaw puzzle, so he sought out Cheng for assistance; yet while Cheng possessed the skills, his initial concern of being incompetent to hold a management position kept him from answering Wu’s call. When the two people finally agreed to cooperate, their knowledge, skills, and resources enriched the competence sets of 85°C Bakery Café.

Besides recruiting professional talents, 85°C Bakery Café also enhanced its competence sets by utilizing information technology and implementing strategic alliance partnerships to increase its customer base. The corporation adopted the point-of-sale (POS) system that is used by many retail businesses to gain comprehensive knowledge of a product's sales status and analyze sales variance in different time periods. For example, they could find out which flavors are more popular and identify the best time for products to come on stack through the information provided by the system so as to ensure that consumers get products of the highest quality possible.

With joint promotions during special holidays, 85°C Bakery Café also utilizes the competence sets and customer bases of its alliances to increase product exposure.

For instance, in 2007 the corporation collaborated with the social networking website, i-Part (愛情公寓), and jointly hosted a Mother’s Day cake-decorating contest, in which the winner was chosen based on votes by registered members (「母親節，愛情 公寓與你相約在85 度 C」活動網站, 2007). The event received enormous positive feedback and successfully attracted more attention to both 85°C Bakery Café and i-Part, making it a win-win collaboration for two different industries, online websites and the F&B business, as well as a success of merging the competence sets of the virtual channel with that of the physical channel.

Figure 17 illustrates the competence set transformation process of 85°C Bakery Café. The flexibility of its competence set transformation can be seen from founder Wu’s own management capability of seeking out collaborators with specialized skills, and further applying information technology to its operational strategy, expanding the customer base, and partnering with other industries.

Figure 17: Competence Set Expansion of 85°C Bakery Café

6.5.2.2. Releasing pains and frustrations in the potential domain

What causes pain and frustration? For customers, when commodity prices are sky high and everything is marked up except for paychecks, it creates a charge. In the past, people thought of coffee and desserts as leisurely extravagances with an underlying tint of being high-end commodities. Being aware of this stereotyped thinking from customers, 85°C Bakery Café provides top-quality products at an affordable price. It effectively released the pain and frustration of consumers, and dissolved the stereotype that “low price implies low quality.” Figure 18, a list of beverages sold at 85°C Bakery Café, shows that the prices of its products range NT$20~$60, which is only half of what other competing chain coffee businesses (such as Starbucks Coffee under the Uni-President group) offer in their stores. Wu once mentioned in a media interview that he “remembers spending over NT$100 for a cup of coffee… that’s like two lunchboxes! It’s simply too expensive and unaffordable!” (王曉玟, 2007).

Horizontal alliances

Expanding the customer

IT applications such as the POS system

Specialized skills Management skills of Wu

Figure 18: 85°C Bakery Café Beverage Menu.

85°C Bakery Café emphasizes that every one of its products is “an affordable extravagance”, which satisfies the visible need of “buying something cheap and good”

in the actual domain of customers. Moreover, it also endeavors to meet and release the needs and frustrations in customers’ potential domains. The following are two instances of its strategies that really consider people’s needs in the potential domains.

(i) It offers customers the option of getting coffee and pastries at the same place.

Formerly, the easiest way for people to enjoy afternoon tea like Westerners was to dine at a high-end restaurant. If they wished to enjoy afternoon tea at home, they would need to go to a coffee shop to get coffee, and then go to a pastry shop to get dessert. The service that 85°C Bakery Café offers is a thoughtful approach to meet the needs in the potential domains of customers.

(ii) It adjusts its products and services according to customer attributes. People’s need to consume food and drinks is what generates the F&B industry. It is a need that is observable in actual domains. However, people might not notice that the “timing” of the needs for food and drinks differs for each person, for example, nurses on night shifts, students attending cram schools, blue-collar workers working at the break of dawn, etc. People active in different sectors than regular office workers may miss the chance to enjoy gourmet food because their hours are not compatible with F&B providers operating during regular hours. These are unseen frustrations in the potential domain of customers. Some of 85°C Bakery Café stores are open 24 hours, and many of them adjust the time that freshly made pastries come on-stack based on their locations to cater to those people who are just getting off night shift or

leaving cram school, ensuring that these people can also enjoy steaming bread fresh from the oven. It is not hard to meet demands in the actual domain; knowing how to relieve needs in the potential domain is what has made 85°C Bakery Café the successful business it is today.

6.5.2.3. Creating and distributing value

Presently every 85°C Bakery Café store has profited from business, ranging NT$150,000~$700,000 per month. Wu is never hesitant to share the values and profits that 85°C Bakery Café creates. Stock options are one of the most vital policies of 85°C Bakery Café. Associate managers and above are allowed to purchase company shares, while bonuses are offered as rewards to employees who work hard to reach monthly targets. Wu is convinced that this can enhance employee engagement with the corporation. Currently, 30%~40% of company shares have been purchased by employees. The mindset that “I am my own staff and boss” will enable each employee to work harder both for the company and for him/herself.

Apart from distributing value to its employees, 85°C Bakery Café also reinvests its created value into itself. To meet the massive demand from stores, Comestibles Masters Co., Ltd. bought 2000 ping (about 6600 m²) of land in Taichung to build a new pastry factory. To keep the corporation in line with international trends and standards, all 85°C Bakery Café stores use state-of-the-art pastry making equipment imported from Japan. The distribution is carried out by over 30 large, compact vehicles in a low-temperature environment, and fresh products are delivered to each store once every 2 days to ensure quality and safety. 85°C Bakery Café also continues to demonstrate its creativity by developing new products with new tastes, such as combining coffee with Taiwanese traditional nougat candy, and selling coffee-flavored egg rolls.

After creating value from its business, 85°C Bakery Café not only shares those values with its employees, but also uses those values to further enrich its competence sets and give back to the community. It distributes the values created in the best ways possible.

6.5.2.4. Creating and releasing charges

Enterprises and organizations can create and release charges directly to target customers (rather than through products or services). The most common way is through marketing techniques such as advertisements and promotional events. Many advertisements create charges for customers through messages that prompt customers

to react in order to release the charges. For example, commercials selling shampoo will always contain a girl with long flowing hair, and with each throw of the head, various messages go through the customer’s mind: “What beautiful hair!” “I wish I had such long glowing hair”, etc., and when the consumer repeatedly receives this sort of message, a charge will be created and may easily be converted into a motive to purchase the advertised shampoo. Consequently, the motive will turn into action when the consumer finally concludes that “I have to have it!”

Similarly, the decorations and geographical locations of each 85°C Bakery Café store are designed to make customers feel the same way. A typical 85°C Bakery Café store is on a street corner. Other than being a clear target that can be easily identified, the position is usually a street intersection with traffic lights; whenever potential customers such as pedestrians, motorists, or drivers make a stop because of a red light, the bright 85°C Bakery Café store will easily catch their eye. The semi-open kitchen design allows customers to see the entire coffee-making process; the sensory stimulations of seeing the dark liquid drip through the espresso machine and smelling the sweet aroma will strengthen charges in customers (encouraging them to turn the thought, “I have to have one!,” into action). Interestingly, unlike most other restaurants, 85°C Bakery Café does not put as much emphasis on its dining space, since the products at 85°C Bakery Café are convenient as to-go orders. Even the display shelves for desserts face outside towards the street rather than in the store itself like regular patisseries. Therefore, the entire purchasing process at 85°C Bakery Café, from giving one's order, paying for it, to taking it away, is done outside the store, which would easily cause passersby to think that there is good business here because of the line outside the store. This induces curiosity in the potential domain. The passersby who may or may not have been planning to make a purchase might stop to take a look, and end up buying something from 85°C Bakery Café.

The display design of 85°C Bakery Café is based on the idea of “creating an impression of a bustling business”. By cleverly turning people into a promotional tool, it creates charges in customers. Note that it can also be regarded as a way to transform and expand the competence sets.

6.5.2.5. Creating a win-win situation

The success of 85°C Bakery Café has created winning situations for different participants. As shown in Table 13, for founder Wu, the success of his business has brought him substantial profits and also the achievement of many of his goals in life (such as survival, security, the feeling of self-importance, social approval,

self-actualization, and so on); for franchisers, their dreams of having their own business are realized through joining 85°C Bakery Café, and they profit from it as well; for employees, the stock options and bonuses satisfy their life goals; for consumers, the convenience, low price, and guaranteed quality of the products and services at 85°C Bakery Café release their pains and charges; and for partners of 85°C Bakery Café through strategic alliances, their public exposure is increased, customer base is enlarged, and competence sets are expanded. To sum up, it is a win-win situation for all those involved.

Table 13: Creating a Win-Win Situation

Participant What they get

Founder Profits

Franchisers Professional assistance in creating a business, realization of the dream of being self-employed, profits

Employees Making a living off of stock options and bonuses while realizing their life goals

Consumers Convenience, low price, guaranteed quality Alliances Increased exposure of one's own brands through

collaborative projects

6.5.3. Summary

Begun in 2004, 85°C Bakery Café has successfully expanded its business volume to more than 300 franchises in Taiwan, Australia, China, and the US. The key factors in this achievement can be summed up as follows.

(i). Creating charges gently

85°C Bakery Café made a breakthrough when it put two different products, coffee and cakes, together. The exquisite-looking cakes and the pleasant smell of freshly brewed coffee create a gentle charge for customers who planned to buy one or the other but who end up buying both products. Additional charges were also created from opening stores on street corner locations despite the higher rent, as well as utilizing outward-facing display shelves.

(ii). Releasing charges effectively

Wu came up with the idea of selling five-star quality goods at affordable prices after seeing people’s willingness to line up to buy a NT$150 five-star quality lunch box when the entire nation was under the threat of SARS. Noticing customers’ needs hidden in the potential domain, 85°C Bakery Café not only provides the best quality

products at the best value, but also offers different solutions, such as adjusting the time that freshly baked pastries come out or offering customers wireless internet access in the store, to release charges for target customers. Its increasing popularity comes from the fact that it can meet many of the actual and potential needs of its customers.

(iii). Transforming and expanding competence sets flexibly

Wu’s management expertise, the professional skills of the five-star hotel dessert chefs, and the aid of information technology contribute to the competence sets of 85°C Bakery Café, and have allowed it to surpass other competitors in the F&B industry. In addition, greater exposure and a larger customer base were gained from strategic alliances with online social networking platforms. The transformation and expansion of its competence sets have allowed the business to continue developing new and better products to create value and a win-win situation for all participants.

6.6. Discussion and Implication

In the above sections, the five case studies discussing innovation and value creation are all consistent with Innovation Dynamics. They might not have Innovation Dynamics in their minds, but unwittingly, they follow the pattern of Innovation Dynamics. If a corporation is aware of Innovation Dynamics, it can avoid stepping into decision traps. By examining the operations of each link in Innovation Dynamics, corporations can understand if each and all links are properly developed, so that they can continuously upgrade their products/services and maximally create value by releasing pains and frustrations for the customers in the potential domains. The Innovation Dynamics can help them to be as successful and competitive as Super Girl, YouTube, Nintendo, Wretch, or 85C Bakery Cafe.

The Innovation Dynamics also points out that each and all links must be properly examined and developed. Missing one of them could lead to serious mistakes. For instance, if the distribution of the created value is unfair or ineffective, the stakeholders can be disintegrated or lose the morale for continuously upgrading the products/services.

Without Innovation Dynamics, people can easily get into decision traps. They may focus on some activities in certain links and neglect those on other links (decision making in changeable spaces), which could lead to serious problems. As an example, suppose corporations emphasize on all the links, except that of pains and frustrations of the customers in the potential domains. They may not be able to

provide the products/services which could really satisfy customers’ needs and release their charge. For example, in Nintendo’s case (Section 6.4), its opponents (Sony and Microsoft) focused their video game console design on the game’s image/sound effects to satisfy people’s gratification of sight and sound. They paid little attention to the gratification of physical movement and emotional excitement of winning while playing a video game. As a consequence, they lost their market competitiveness to Nintendo. The case clearly shows that if companies cannot create value, they cannot survive. To create value, companies need to reduce or remove the pains and frustrations of potential customers in the potential domains.

Let us look at the following example, the failed acquisition of BenQ-Siemens, to illustrate how innovation and business management can fail if decision makers are unaware of the major points of innovation dynamics. BenQ-Siemens was the mobile communications subsidiary of the Taiwanese BenQ Corporation. In October 2005, the division was formed out of BenQ's acquisition of the then struggling Siemens Mobile Group. The goal of the company was to pull together BenQ's lifestyle experience, their renowned design team, and Siemens' engineering capabilities to create a new leader in the mobile communications arena. Unfortunately, due to huge financial losses of over NTD35 billion (which is about USD1.1 billion), in September 2006, BenQ announced that it would stop investing in the German division of the company (Siemens Mobile Group). BenQ-Siemens filed for bankruptcy in a Munich court in 2006, and the acquisition failed.

According to Pritchett (1987), companies have as much as a fifty-fifty chance of achieving a successful merger, with the worst case findings of up to 80 percent of all mergers being disappointments. Merger and acquisition, as two ways to expand corporate CSs, are actually an integration of different corporate HDs, including different human resources, skills, technologies, management styles, problem solving attitudes, corporate cultures, etc. Some of these parameters are observable, but some are not. If BenQ had understood innovation dynamics, it would have been aware that in link (i) to (ii) of innovation dynamics (see Figure 6), the variables hidden in PDs (such as attitudes, management styles, cultures, etc.) must be taken into account when expanding or transforming their CSs. The difficulties of integrating two corporate CSs and HDs should not be underestimated, and this risk-taking strategy could have been avoided or at least reconsidered.

A similar experience occurred to Dell, which attempted to reinvent itself from a PC and server maker to an all-encompassing IT products and services company, but did not succeed in launching its first smartphone product or buying a small,

little-known developer of high-end data storage technology called 3PAR (藍書平, 2010). Although it is good at manufacturing and delivering low-cost PCs, Dell missed cues from its markets that the company needed to change. It focused on maximizing earnings out of its existing resources and capabilities rather than thinking about what its customers needed. As indicated in link (ii) to (iii) of innovation dynamics, this can lead to failures or mistakes. Therefore the company has not had an easy time claiming a bigger stake in higher-margin corporate-focused businesses – like storage services that 3PAR offers – and fast-growing consumer markets such as smartphones.

Chapter 7. Contributions and Conclusions

7.1. Contributions

While pursuing a better decision making tool or problem solving model, one must remember that it is human beings who are making decisions. To solve decision

While pursuing a better decision making tool or problem solving model, one must remember that it is human beings who are making decisions. To solve decision