How to Banish Bad Habits from Your company

 

[Editor's Note: This is an unusually long article for Issues for Growth. However, I was struck by the importance of the subject matter and thought that as business owners and CEOs, we could all benefit from this. If you would like to read the original article, see Strategy + Business. I hope you find this useful.                            -dpm]

How to Banish Bad Habits from Your company

The idea that companies may unwittingly use inefficient processes and pursue poorly focused strategies is not new. Corporate history is littered with examples of businesses being too slow to spot redundancy and incumbents being put out of business by nimbler new entrants.

But what if this phenomenon could be explained by a simple concept? Perhaps companies have allowed bad habits to creep in, and just don't know it. Furthermore, what if bad habits are so ingrained that executives have lost sight of what defines best practices? Or are blind to the possibility of being disrupted?

The following is an interview with Freek Vermuelen, author of the book Breaking Bad Habits: Defy Industry Norms and Reinvigorate Your Business(Harvard Business Review Press, 2017).

Vermeulen found that executives are likely have blind spots that prevent them from noticing and weeding out bad habits - such as a strategy that might have worked for years, but that no longer does. In other words, they are doing something because "that's how we have always done it." Like viruses - at least currently - bad habits can't be eradicated, Vermeulen admits. But a focus on diagnosing them is a good start, and can even create sources of innovation.

Vermeulen spent an hour with strategy+business in his offices at the London Business School, overlooking the city's Regent's Park, in November 2017. Much of the conversation revolved around how his many years observing corporate bad habits had been synthesized in his book.

S+B: At first glance, the idea that there are bad habits in companies doesn't seem that surprising, because many companies have corporate cultures that go back a long time. They may be set in their ways. What's the difference between that and the bad habits you describe? 

VERMEULEN: Of course you're right - it will surprise no one that, over time, especially larger organizations can be a bit rigid and old, and bad practices slip in. But basic economic theory would simply say, "That's too bad for these firms, but they will be outcompeted. There will be other ones. And gradually, they will not grow, they will shrink, they will go bankrupt, and so on." That's actually the whole basis of capitalism; we say bad firms with bad strategies and practices will die out, and therefore, things will get better.

The idea that obsolete strategies will automatically die out is not necessarily true. But I hear executives quite often use it as an excuse: an explanation where they say, "Gosh, this practice or process has been around for decades in our industry." I have a CEO in mind now who said to me, "Freek, if this wasn't the best way of doing things, I'm sure it would have disappeared by now."

So, although we may know in an abstract way that old practices sometimes need to be changed, for particular individual practices, we still think that because everybody's been doing it for a long time, it must be the best way of doing things. "We've already been doing it this way for two decades. We know it works. And if it didn't, it would have disappeared by now." I've tried to explain properly and thoroughly why that assumption is wrong.

S+B: Why is it that organizations are afflicted by this, even as we are surrounded by management discussion about the need for change and reinvention? 

VERMEULEN: People forget. Someone in the firm invents the wheel. "This is the way to solve it," they say, and then the organization passes this on to the next generation in the organization. That's one reason organizations exist, you know? So you don't have to reinvent the wheel all the time. But we think this process works, and we just pass it on, not being aware of when circumstances change, especially when they change gradually. When there's a big shock in the environment and a new competitor or technology comes in, we notice. But when things gradually change, we don't notice and we just continue doing it this way.

And indeed, lots of companies talk about agility and flexibility and change. I have some doubt about the importance of those attributes. There are still many relatively stable and homogeneous industries around. But also, understanding the need for change on an abstract level is different from understanding a specific case: saying, "Hey, this process, why are we doing it this way?" There's a gap between having an abstract understanding of the need for change and actually identifying what should change and making it work in your own organization.

S+B:

How do bad habits creep in and stay there, then?    

VERMEULEN: One way is when something starts out as a good practice, but as circumstances change, it no longer is so good, which means it's very difficult to catch. Various examples, also from my own research, show that bad practices can come into existence as bad practices and, still, they can spread and survive. I puzzled about that for quite a long time, because it's such a fundamental issue in strategic management and in economics: Why do bad practices spread? And I found the answer in cultural anthropology. Even bad practices have advantages and disadvantages. And sometimes the advantages are much more obvious than the disadvantages - for example, because the advantages happen in the short term whereas the disadvantages happen in the long term. And if these disadvantages then outweigh the short-term advantages, we still don't see that, because there's lots going on, there's a long time lag, and so on. My research on the in vitro fertilization [IVF] industry is a good example of that.

How Good Habits Go Bad

S+B: You refer to this as "causal ambiguity."
VERMEULEN: Yes. I did a big quantitative research project on the IVF industry for fertility clinics in the U.K. The majority of these clinics are private. IVF is a big business. But at the inception of this industry, when permission to perform the procedure was granted simply by the government, the government said every clinic had to publish its success rate. And the government did that with good intentions. They wanted to increase transparency in the market and aid consumer choice and so on.

But what the government hadn't realized - and I think this clearly generalizes to other industries - is that the success rate of a clinic depends not only on how good it is as a company, and how good it is at the procedure. It also depends on the input. Some patients are easier to treat than others.

The very first person I interviewed in this industry immediately started talking about this. It's a big topic in the industry. Clinics started selecting their patients, because their leaders thought if they treated only easy patients, their success rate would be higher. The clinic would be ranked higher in what the government called the league table. It would look better. And that has all sorts of immediate benefits.

But what I found out through this research project is when we measured the effects of this practice, it showed that in the long term, clinics that select only easy patients to treat are worse off. Clinics that treat difficult patients become better off, because these difficult patients become a source of innovation.

S+B: So one way to break bad habits is to stop doing the obvious, and this itself will be a source of innovation?   

VERMEULEN: Exactly. This study showed that more and more clinics started to adopt a practice that, in the long term, was bad. And because it was only in the long term that they were experiencing trouble, they still didn't realize that it was the practice of seeking only easy patients - the bad habit - causing the lack of innovation. If you had a bad habit and you stopped this practice and said, in this case, "We're also going to admit and treat difficult patients," you would trigger innovation.

I encountered other examples. For instance, a company making wound-care products told me that company leaders started debating making products for very complex wounds that very few patients in the world suffered from. And they said, commercially it wouldn't make any sense to manufacture these products because there are so few patients, and a lot of work goes into these products. But when I talked to the engineers, they said that they learned a lot from these cases, and you could trace a lot of innovation in the company's regular products back to those complex cases. So I would say: Pursue the complex variants of your core service or core product, and that pursuit can be a source of innovation - while ridding you of bad habits.

S+B:

You've said also that companies unknowingly adopt bad practices when they try to benchmark their organizations. In other words, they can unknowingly make matters worse. How is that?   

 VERMEULEN: Benchmarking is by definition where companies look at the best-performing companies in their industry. What companies don't look at is the bottom-performing ones. Companies therefore are inclined to imitate the practice and strategies of the top 10 performing companies - whichever they pick in the benchmarking exercise. But of course different strategies and practices are often associated with different risks. Some strategies may, on average, result in worse outcomes, but because they are high risk a very small minority of these companies will actually have good performance due to sheer luck. Therefore, these companies that are benchmarking take too much into account companies that simply got lucky.

S+B: Are bad habits essentially a product of herd mentality or groupthink? I think of an example in which a company feels under pressure to enter an emerging market such as China because its rivals have done so or might do so.
VERMEULEN: Yes, there's certainly a close relationship between bad habits and herd mentality. In economics, we call this herding theory. Because in a way, there is safety in numbers, and herding, including the imitation of bad habits and bad practices, happens only in situations of uncertainty. "This strategy to enter China, we don't quite know how it will play out," company leaders will think. And it's a very human behavior, but we also know it from research on organizations. We look around us, and sometimes we follow the benchmarking exercise and we look at what others do, and if the majority of companies go into the Chinese market, then we say, "We'll have to go there as well."

In this way, bad habits and bad strategies can also spread. Now, it's  true that if you want to resist that norm, you have to be brave because of the herd mentality. If you do go into the Chinese market but it turns out to be a dud - which it did, by the way, for quite a few industries - people won't blame you so much because they will say, "Well, everybody got it wrong."

But if you're the only one who stays out and everybody goes into the Chinese market and you think, "I'm not going there because I think there's an 80 percent chance that it will fail," and then it happens to be the 20 percent and it turns out to be OK, everybody will say, "You idiot. Everybody else saw it and you didn't." And you get blamed.

Even Startups Succumb

S+B: Is the habit of bad habits worse in large, older companies than in small, newer companies?
VERMEULEN: We see from research, including my own, that new entrants are often under pressure to conform to other parts of the industry. So, although they might not have these rigid processes and systems and other legacies in place, there is also external pressure on them to conform.

For instance, consider the investors or, indeed, customers or employees who say, "Gosh, everybody's going into China. Shouldn't we do this as well?" or "Everybody has a partnership structure in consulting. If we come in as a consulting firm, shouldn't we also have a partnership structure?" That is, there is external pressure to conform, and that external pressure can have real consequences. If you resist the norms, you find it difficult to recruit. You find it difficult to access money from investors. We do know that, for instance, suppliers might react by saying, "If you want us to work with you, you have to adapt more to how we do things in the industry."

S+B: To what extent do suppliers and customers reinforce bad habits?  VERMEULEN: To a great extent. Let me give you an example of academic research that I'm conducting right now. This is research with a former Ph.D. student, Amandine Ody, who is now a professor at Yale. We're studying the market for champagne grapes. In this industry, the suppliers grow the grapes and sell them to champagne houses, which turn them into champagne. We're looking at champagne houses that are trying to do something different in their supply chain - for example, by making sparkling wine in California or producing wine for supermarket brands. These are considered clear "norm violations" in the French champagne business and something a good house is not supposed to do. We then measure whether these houses are suffering penalties for such actions - such as their suppliers saying, "If you also produce wine in California, we'll charge you higher prices for grapes," which would create a short-term disadvantage. And even if such a champagne house might still be better off in the long term doing it, they often don't dare do it because of the uncertainty. So, companies that try to go against the norm often get pushed back into the norm by the ecosystem they are in. We also see that happening with new entrants.

S+B: What may seem a bad habit in the West may not be in other parts of the world - and vice versa. Is that fair? 

VERMEULEN: Sometimes regions can also be a source of bad habits in the sense that what can work in one geography, if transferred somewhere else, doesn't necessarily work. There is good research available on the old total quality management approach, which came from Japan and then was applied in the United States. People started doing it because they thought, "This is a good practice, it worked wonders in Japan," but it got transformed in a different cultural context.

Clearly it can work the other way around as well. Going back to the idea of breaking norms, an entrant from a different geography can come in and do things differently in a way that's successful. And that can trigger change in an industry.

One example is the practice of detailing in pharmaceuticals marketing. In many countries, there are restrictions on drug advertising, so salespeople adopt the practice of handing out to healthcare professionals samples and information on certain drugs that's not technically advertising. It's a huge practice. There is research on the effectiveness of it by two Columbia professors. On average, these salespeople have to give out 26 free samples to induce just one new prescription. It's very obviously not cost-effective anymore. And I say "anymore" because it might have started out as a good practice; it just has been pushed up to such levels that it's now wholly ineffective.

The pharmaceutical companies I spoke to all said, "Yeah, everybody's having doubts about whether it's still effective," but they stick with it because of, again, uncertainty. "We don't know what will happen if we stop it or if we scale back."

Then I spoke with a Japanese company that had entered the Western European market and said it was not going to use detailing. The company was quite successful. This is a case of an entrant from a different geography doing something different, triggering change. So inasmuch as bad habits can come from different sources, solutions can too.

Escaping the Pattern Trap

S+B: What is your solution for breaking bad habits? 

VERMEULEN: If you're a large company and you have suspicions that surely there must be bad practices in your industry and bad habits in your firm, you may not know which ones they are and how you get rid of them. I do a lot of work on that, and I have quite a lot of normative implications that I've thought through, and research on what sorts of things you can start doing.

One solution is something we've talked about already: deliberately trying to make your life difficult by doing difficult variants of your product, as in the wound-care example. But I also have a large project I've labeled Change for Change's Sake, which I wrote about in a Harvard Business Review article a few years ago. There are various things that you can structurally build into your organization. If you are a CEO and want to start identifying particular examples, there are certain things that you can think of.

One - which I use myself when I'm getting to know a company - is asking company leaders: "Why do you do it this way?" As we mentioned earlier, people will say, "That's just the way we do it, and that's how we've always done it." Every time I get this answer, I think, "If you cannot explain to me for your own company why this is the best way to run things, we might just have identified a bad habit."

S+B: Not being able to spot bad habits may have been problematic in the past, but it is all the more problematic given such disruptive forces as robotics, artificial intelligence, and automation.
VERMEULEN: Yes. But there's a distinction I would like to draw. People talk about disruption all the time and what could such and such a company do or what could others do. They always think about it in terms of what could someone develop that's new in technology that would disrupt us. The automotive guys talking about Tesla is a case in point.

What I'd say is different in my work is that the starting point is not "What else could we do in this context?" but "What could we stop doing?" In other words, what things is a company still doing that actually don't make much sense anymore, because things have changed? That's a good starting question as well.

Now, I have looked closely at companies that have asked this question. One is citizenM Hotels, originally a Dutch company, not entirely coincidentally. But it really took this idea explicitly as a starting point, and if you go to a citizenM you can see it.

The company decided that the hotel industry is very homogeneous. There are things that hotels have been doing for years, such as having a concierge. But today, a lot of people use TripAdvisor or other apps, rather than a concierge, to find a good restaurant near the hotel. You might observe that many hotels have a restaurant. Here in central London, who wants to sit in a hotel restaurant? We still have a check-in desk where you have to queue for 20 minutes before they give you your key. Yet we probably printed our own boarding pass at a kiosk in the airport. So citizenM asked the question, "What if we stopped doing these traditional things?"

Company leaders not only took the kiosk idea from airports but they also went to look at the rooms in cruise ships to design a small bedroom that could still be luxurious. So they really looked for analogies, solutions from other businesses, in search of good practices.

I have another example, this one from financial services: Capitec, a young bank in South Africa. When you come into a traditional bank and you want to open an account, they first want to ask your salary and take you down a path of various banking products, depending on your answer. The Capitec CEO said to me, however, "Look, when I go to Nando's [restaurant], they don't ask me for my salary and, when they know my salary, get me a different menu with different prices and food. I get the same menu, same food as everyone else. Why is that different from a bank? That's what we stopped. Everybody gets the same account. Everybody gets a gold card. That's it."

The vast majority of people in South Africa want to do just three things at their bank: savings, transactions, and maybe borrowing. Capitec has one basic account from which a customer does these three things. And by doing it this way Capitec has managed to offer 50 percent better rates. It was profitable in Year Two, which in banking is nothing short of a miracle, because switching between banks is extremely rare. More people get divorced in the U.K., for instance, than switch banks. And Capitec has 9 million customers after 16 years.

Another example of Capitec's original thinking is its banking hours. In South Africa, retail banks close at 3:30 in the afternoon. And the Capitec CEO said to me, "I didn't understand why. And then I figured it out. It was probably left over from the days that money was physical and at the end of the day banks needed an hour or two to count the money and balance the books and so on. Now, 99 percent of the money is electronic and that happens in a split second - but banks still close at 3:30." One of the first things the bank did was set its hours to be open until 6:00 in the evenings. It is also open on Sundays. "We are a retailer" was how the CEO summed it up.

S+B: But isn't there a blurred line between breaking bad habits and simply innovating?
VERMEULEN: Yes. Each is one side of the same coin, perhaps. Stopping doing certain things is a different route to innovation. I said to the Capitec CEO, "You're a disruptive innovator." And he replied, "I'm not a disruptive innovator. We aren't actually doing anything new. We haven't invented other things to add to this. All we have done is stop doing certain things." As I said, this type of relatively simple thing, stopping a bad habit, really made them very successful.

S+B: Is it realistic for companies to break bad habits in any significant way in the next five or 10 years? 

VERMEULEN: Perpetuating bad habits has been around forever and likely will always be around. It's part of nature. It's the same model as you see in epidemiology and viruses. Bad habits operate like corporate viruses. A virus persists and spreads. Bad habits also spread and persist. They persist despite having a negative influence on the host and even reducing life expectancy.

This explains why capitalism, economic theory, is too naive. Will we eliminate corporate viruses? No, we'll never eliminate all biological viruses or all organizational viruses. But what we can do with viruses in nature is identify the virus and say, "We're going to try to tackle this."

Bad habits won't disappear automatically through competition, just like nature doesn't weed out viruses automatically, but companies can inoculate themselves by building in certain processes. They can identify the source of their troubles, and say, "This is the virus that we're going to try to get rid of."

  

Author: Jeremy Grant is international editor of strategy+business.

   

What are your thoughts about these key points? Share your reactions.

He Was Not Afraid of the Dark¹

[Editor's Note: Many of you may be faced or will be facing difficult decisions about how and what information to share with your managers and employees. The following article may seem to some to be an unusual addition to our collection, but it has a poignant message for CEOs and business owners from that renowned management guru, Mr. Rogers.  Simple, direct, honest and open communication is always best.

Even if you can't fix it, explain it. I once asked my then toddler daughter why she liked to watch Mr, Rogers. She replied, "Because he talks to me, Daddy."

This article, when we first shared it in 2003, evoked a visceral response and had the highest reader response rate of any other single Issues for Growth e-letter. February 19th marked the 50^th anniversary of the debut of Mr. Roger's Neighborhood. Somehow, in today's world, when we need direct, honest, open communication, it seemed like a great time to republish this.                   -dpm]

He Was Not Afraid of the Dark¹

   

If you remember Mister Rogers as being as warm, fuzzy and innocuous as a cardigan sweater, then you did not really know Mister Rogers. It is true that Mister Rogers' Neighborhood was an island of tranquility in a children's mediasphere of robots and antic sponges. And in real life, Fred Rogers, who died last week of stomach cancer at age 74, was evidently as sweet and mild mannered as the kindly neighbor he played on TV. An ordained Presbyterian minister, he didn't smoke, drink or eat meat, prayed every day and went to bed by 9:30 each night. To cynics and parodists, Mister Rogers' Neighborhood was a namby-pamby zone of pint-size feel-goodism, and Mister Rogers himself a wimpy Stuart Smalley for tots.

But part of what made Mister Rogers' Neighborhood great and unique is that, for all its beautiful days in the neighborhood, it was also the darkest work of popular culture made for preschoolers since perhaps the Brothers Grimm. Mister Rogers was softer than anyone else in children's TV because so many of the messages he had to impart were harder. That your parents might someday decide not to live together anymore. That dogs and guppies and people all someday will die. That sometimes you will feel ashamed and other times you will be so mad you will want to bite someone. He even calmed fears that may seem silly but to a child are real and consuming - like being afraid to take a bath because you might be sucked down the pipes. Mister Rogers gently sang, "You can never go down/Can never go down/Can never go down the drain."

In other words, Fred Rogers knew that childhood, which we mis-remember as carefree and innocent, is a time of roiling passions, anguish and terror.

His show, the first version of which debuted in 1963, was his professional way of doing what he had done as a boy in Latrobe, Pa., when he played with puppets to calm himself after hearing scary news reports. And perhaps one reason his death touched adults so deeply is the feeling that Mister Rogers left us when we could especially use someone to teach us to manage our children's fears, and our own.

The last original episode of Mister Rogers' Neighborhood aired on Aug. 31, 2001 - a scant 11 days before we needed him to explain the biggest Big Inexplicable yet. He returned to tape public-service announcements on how to talk to kids about the Sept. 11 anniversary, but the anxiety has only built since then. War jitters, orange alerts and duct-tape mania have rendered literal our most childlike, monsters-under-the-bed fears: that a tall building can collapse like a house of cards, that something bad can seep in ghostlike through your window and hurt you. ...

... We relied on Mister Rogers to explain death and hurt and sadness, not to eradicate them. CEOs, business owners and senior executives might take a few lessons from Mister Rogers. For instance, that an explanation of a bad thing is only reassuring if it is straightforward and direct. Mister Rogers spoke softly, but he never soft-pedaled. And he knew how to be both compassionate and authoritative. He was "Mister" Rogers, after all, never "Fred." He wore a tie even when he dressed down. He also respected children's intelligence, and while he used the Land of Make-Believe to teach lessons, he never puffed up kids with false promises and fantasy. There is no more un-Disneyfied sentiment in children's pop culture than the title of his song Wishes Don't Make Things Come True.

PBS' website offered tips for helping children cope with Fred Rogers' death. "You may be surprised," it said, "to find that you're more upset than your child." But that should surprise no one. Kids, after all, will have hundreds of Mister Rogers' Neighborhood reruns to help them through their spooky moments. But who is out there today, in any neighborhood, to reassure grownups that we can never go down the drain?

¹ In a nervous age of orange alerts, who will take the place of Mister Rogers?

By James Poniewozik Monday, Mar. 03, 2003 Time Online Edition

What are your thoughts about these key points? Share your reactions

Why every company should be doing scenario planning: How well are you prepared for what you don't think will happen?

[Editor's Note: I recently listened to a positive economic forecast for the first half of 2018 and was struck by an interesting caveat made by Alan Beaulieu - when the economy is continuing to go up month after month, optimism about the momentum and duration of the economic upturn has tended to blur our vision. History tells us that most of us tend to ride on our optimism and miss the turns in the markets (Think the tech bubble of the late 1990's or the big surprise in 2008).

Do we really know how this is going to play out over the next few years? There are a number of different views of where the markets and economy may go. But, we all need to chart a direction for our companies.  With great uncertainty and multiple different views of the future, a company needs to do scenario planning, so that it thinks about the different possible views of the future and how it would move or adapt to best position itself for success.

The Mead Consulting Group utilizes scenario planning to help clients build flexibility into planning and execution and to help leaders think "broader." This last recession was a game-changer. While scenario planning was once conducted primarily with our larger clients, today, over half of our clients (owner-operated, strategic, and private-equity- backed) have discovered the benefits of scenario planning.  - dpm]

    

 Why every company should be doing scenario planning 

If your business or industry is predictable, you need not continue reading. If, however, there is uncertainty about the future of your markets or industry, then your company should examine the way it plans. It isn't just healthcare companies, either. I would submit that there is little real predictability in most industries.

Making assumptions gives us a false sense of security and puts blinders on us.What is the old line about the word "assume" making an "ass out of you and me?" Not to be profane, but traditional strategic planning totally botched the economic downturn/recovery of 2008 - 2017. Traditional strategic planning is based on assumptions. The planning group makes certain assumptions about the future - about variables such as economic, political, social, technological, regulatory, environmental, etc. Making assumptions is just another way of saying we are attempting to predict the future.

Really? I would suggest that there are situations where economic, social, political, technological, regulatory, and environmental factors will drive fundamental change in every business and industry of every person reading this e-Letter. It's really only a question of degree, pace, and timing.

Various organizations/industries (e.g. Blockbuster, Kodak, print media, broadcast media, distribution ...the list goes on...) could have avoided significant market pain by utilizing scenario planning. Without being overly critical, these organizations/industries were complacent - and they made assumptions about the future that proved to be very wrong. Each was overtaken by forces that were not within their traditional industry competitive analysis.

Have the courage to consider the tough questions. How will your business be impacted by the following?    

* Technology - How much will technology change your industry?

     Will your business or industry be affected by any of the following:

• Mobile ordering; Mobile product/ price comparisons
• Mobile payments
• Artificial Intelligence
• "Showrooming" in brick and mortar stores and buying online (e.g. Best Buy vs. Amazon)
• Contextual offers/specials, loyalty programs, other specific knowledge about customers
• Social commerce
• Apps for everything
• Efficient visibility and management of supply chains (from end user order entry - directly impacting each step of the supply chain)
• Amazon ....everywhere

*   Geopolitical 

*   Social/Environmental

• Power moving to the consumer (away from institutions)
• Buyers have equal or greater knowledge than sellers

*    Changes in culture, attitudes

• Will 20-something millennials continue to defer the desire for home ownership?
• What long-term impact will the "sustainability" movement have on markets, products, and attitudes about companies

*    Demographics - Is your customer base affected by demographics?

• Aging population in certain markets
• What does the negative birth-rate and aging population mean for European economies like Greece, Spain, Italy, or Iran and Iraq
• Baby boomers retiring, selling businesses, eldercare, etc.

*    Economic

• Is the U.S. facing a period of structural unemployment?
• Potential future periods of inflation
• Will increasing labor rates continue to make China less competitive? How will outsourcing look in 5-10 years?
• What will happen to Europe after Brexit?
• Impact of Cryptocurrencies

   

*    Regulatory - The list is endless...

• Healthcare / Affordable Care Act
• FDA
• EPA
• Trade
• Tax reform (Elimination of subsidies, elimination of deductions)

Companies can no longer ignore uncertainty or try to assume it away. Some organizations will say scenario planning is too difficult and elect to take a simpler course.  Most organizations perform traditional strategic planning or business planning/ budgeting because it is comfortable and addresses a short timeframe. However, we now know that the world is uncertain and interconnected. Companies can no longer ignore uncertainty or try to assume it away.  As author H.L. Mencken is quoted, "For every complex problem, there is an answer that is clear, simple, and wrong."

That is your opportunity. Since the 2008 downturn, we've seen the number of our clients that are doing scenario planning has more than tripled.  Companies that are scenario planning are examining different possibilities of the future and determining their competitive response. They are modifying the trends and information that they monitor so that they can develop "early warning" signs. These companies are building flexibility into their planning and adaptability into their leadership and culture.

If you want more information on the Mead Consulting approach to scenario planning, please contact me

   

What are your thoughts about these key points?

If customers are so important, why don't we know more about them?

                                                                                               

[Editor's Note: In an age where there is so much talk about the being close to the customer, why is service so bad, leaving customers feeling more estranged than ever from providers of products and services. CRM, customer-friendly, customer intimate, and customer-centric language abounds. Could it be that company resources are stretched, trying to please too many customers? Perhaps we would have better performance if we focused on our best customers. - dpm]

•  KNOW WHO YOUR BEST CUSTOMERS ARE. All customers are not created equal. Research indicates that it is not unusual to find that over 50% of a typical company's customers are unprofitable when all cost factors are considered. In some companies, over 85% of the profit may come from as few as 10% of the customers. Start by ranking your customers by net profit generated. Include all costs of doing business - direct product and service cost, handling, order processing, administration, delivery. What are the patterns? Which customers present the greatest opportunity for profitable revenue expansion?

• DON'T TREAT ALL CUSTOMERS THE SAME. You can't be all things to all people. Once you have determined your best customers, focus on deepening the relationship. Gaining additional share of a customer's business is usually much more profitable than finding a new customer. Offer meaningful services that demonstrate their status. Such services as a priority position in the manufacturing schedule, priority delivery, access to training, etc. need not add much cost to your operation, but can clearly bring your "best" customers closer to you.

•  CHOOSE YOUR CUSTOMERS. Develop profiles of your best customers. Are there common characteristics?  Once the profiles are developed, go out and find more customers just like your best customers. Use market research and on-line tools to develop targets so that you focus your resources.

• MAKE YOURSELF INDISPENSABLE TO YOUR CHOICE CUSTOMERS. Make it your business to learn your customer's business. Find the pain in your choice customer's business and look for ways to help him solve it. Do that a few times and you will be perceived as not only valuable, but indispensable.

• MAKE "KNOWING YOUR CUSTOMER'S BUSINESS" PART OF YOUR CULTURE.Create special programs that identify your best customers to all of your employees. Make it every employee's job to find ways to better serve the choice customer. Make certain that compensation and reward systems recognize the importance of pleasing the key customer. 

• ALLOW OTHER CUSTOMERS TO "OPT-IN". Companies that have adopted this "choice customer" strategy have been pleasantly surprised to find that many of their other customers select them and opt-in. Although these customers may pay slightly higher prices and have different service levels, they find the customer-centric culture appealing. Many companies have developed different tier priority service designations for these opt-in customers, but find additional ways to demonstrate superior relationships.

We help clients think differently. The Mead Consulting Group helps clients develop a process to identify net profitability by customer and product and then to develop strategies and tactics - and the cultural norms needed - to increase the client's share of the most profitable business. If you would like more information on how this might be applied in your organization and how we might help you and your company accelerate the process of adding value and moving your company to the next level of performance,  please contact me by email or (303) 660 -8135.

Avoid Becoming a Commodity

[Editor's Note:In a recent conversation, the leader of a company explained that his was a commoditized business - just like many others in his industry. I asked him why anyone would choose to buy from him  unless he offered the absolute lowest price. He looked a bit bewildered by my comment and then responded that fighting price competition was his company's biggest issue. It made me think of an article about differentiation. I hope you find it useful.                                    -dpm] 

 

All products become commodities. All industries become mature.

You wake up one morning and realize that your products have become commodities. Your competitors all have basically the same "stuff" to sell and your sales people are constantly pressured to lower prices. Margins are being squeezed. You can't believe the price that a competitor just quoted to lure one of your customers. You know all of the competitors - they are not in any better position than you. This just isn't fun anymore!

 

Welcome to life in a maturing industry where growth is slowing - or may even be declining, all of the competitors and customers are known, and customers change suppliers or products for a lower price. Maturity comes to all industries - materials, products, or services. Whether you provide concrete or steel, or develop and sell software, your industry matures and your product sooner or later becomes a commodity. In today's environment, the path to market maturity is much faster than ever before.

 

Good News. Your customers know the answer.

There is some good news. There is big money to be made in mature markets. Some companies in mature industries command premium prices, have low customer attrition, make excellent margins, and continue to grow. But, it requires some different thinking about your customers, products, and markets.

 

Don't look for the answer inside your company. Creating services and solutions around products is not the answer if you are not pointed in the right direction. Get to know your best customers better (that is, your most profitable customers on a net profit basis). Ask them about their business, their problems, their pain. Survey and interview customers. Go to their facilities. Meet with their top managers. Listen and Observe. What are they really buying? Where do they need help?

 

When is a product more than a product.

Years ago, one of our clients was selling sophisticated diagnostic scopes to physicians, but technological advances slowed and it was difficult to expand the market. Pricing became very competitive. It was difficult to convince physicians to make a big capital purchase. The company interviewed dozens and dozens of physicians and office managers and discovered an interesting issue. Since the scope had to be sterilized between patients and the sterilization procedure for scopes is lengthy, physicians and their staffs continually had a problem having a sterilized scope available. The company decided not to sell scopes to physicians, but to offer a fee-based service - providing clean, sterilized scopes to physicians. They wrapped a product with a service and solved the real problem for physicians. Margins soared. Pricing was no longer an issue...they were selling more than a scope.

 

Do things your customer doesn't do well or want to do.

A client in the industrial distribution business found that some of its customers were having difficulties hiring and retaining qualified welders, and there were safety concerns with their customers' painting and welding production environments. The client offered to begin to deliver "finished" components (cut to size, fabricated, welded, and painted) right to the final assembly line. Revenue and profits increased. What is even more significant is that the customer now has an indispensable relationship with the supplier.

 

Change the way your product is packaged, managed, delivered, or used.

Another manufacturing/distribution client found that their customers were poor planners. Routinely the customer would show up at their warehouse in the morning to pick-up product and materials for the day's job. By the time they arrived at the job site, it was after 10:00 am. The client offered two services to help: An early morning pick-up - any order that arrives by voice mail, fax, or email by 11:00 pm is staged and ready for pick-up by 6:00 am. They also offer a project management service. The distributor manages the delivery of materials according to a job project schedule which the distributor continuously monitors for the construction customer. This ensures that the right materials are delivered to the right site at the right time. The distributor cannot command a significant premium for these services, but doing business in this manner actually saves them money and builds customer loyalty.  

 

Can technology change things up?  

Another company produced capital equipment which provided a static diagnostic testing for their customers in the power industry, The problem - it required that the customer's equipment be turned off during the diagnostic test. The company came up with a means to add sensors to their customer's equipment and to provide a continuous monitoring service for a monthly fee. Margins and market size both increased dramatically. Customers were ecstatic about not losing productive time on their equipment   

 

Your Customers may hold the key to differentiating your commodity product or service

• Determine what the CUSTOMER is buying? Survey and interview the customers - Listen to their pain and their needs in their business

• Change the way your product is packaged, managed, delivered, or used

• See how technology might change the economics or competitive environment

• Perform some of the processes and/or functions now performed by your customers

• Make the product more than a product

  

What are your thoughts about these key points? Share your reactions.

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We help clients think differently. If you would like to discuss how we might help you and your company accelerate the process of adding value and moving your company to the next level of performance, please contact us.