Monday, April 30, 2007

Sometimes the Best Path is Behind You

The Story
Over the years, I have had the privilege of enjoying dinners with a good number of top level executives. The conversations can often drift to cover a great many topics. Here are two examples.

One time, I was at a dinner where there was an executive who was getting tired of the hectic business life. He was too young to retire and had not been in the executive ranks long enough to build up a sizable cash reserve to live off of. Therefore, he was considering simplifying his life down to the bare minimum, in order to afford no longer being a business executive.

He came up with an annual income figure in his mind that he felt was the absolute lowest a person could live on. The idea was that if he could figure out a way to create an income stream that low, he might consider getting out of the “rat race” of the business world.

The annual figure he came up with, in today’s dollars, would probably be in the low $100,000s. I was quickly working the numbers in my head, and the number he had chosen was about twice the average family income at that time in the United States. Approximately 75% of the people in the U.S. were living at a level below which he thought to be the absolute bare minimum a person could live on.

This executive could see the puzzled look on my face as I was contemplating these statistics in my head, so he responded, “That’s a very low number. Why, I can’t think of anybody I know who makes less than that.” Of course, virtually every one of the hundreds of people who worked for him made less than that. But I guess they don’t count. Otherwise, how could he live with the fact that he was paying people less than what he though was the bare minimum a person in the U.S. could live on?

At another dinner, about 15 year ago, I was sitting at a table with a number of top executives. During the conversation, one of them started talking about Wal-Mart. He said, “I don’t know why anyone would shop at Wal-Mart. My wife tried it once and she hated it.”

Then, all of the other executives started agreeing with him, saying that their wives also hated the store. Their consensus was that Wal-Mart wouldn’t last, because nobody likes the store. Finally, I couldn’t take it any longer, and I said, “The average family in the United States makes under $30,000 per year. They do not shop Wal-Mart because they want to; they shop it because they have to. They cannot afford to shop elsewhere like your wives.”

The top executives responded to my comment with silence and then shifted the conversation to talk about their favorite French wines. Oh, by the way, these executives were in the retail industry.

This leads me to my third story. Whenever you fly on an airplane, before you take off, the flight attendant tells you about the safety precautions. At some point in that speech, the flight attendant usually says something like this, “In case of an accident, please proceed quickly and orderly to the nearest exit. Keep in mind that the nearest exit may be located behind you.”

At this point, a few of passengers will try to turn around to see if their nearest exit is behind them. It is a very uncomfortable thing to do, because the seats were not designed for looking backwards, especially if you have your seat belt on.

The Analogy
Businesses will only survive if they satisfy the needs of their customers. Since most top executives have incomes higher than 99.5% of the developed world, it is highly likely that the customers these executives are trying to serve (or, if you are in an OEM business, the customers of your customers) make far, far less income than they do.

Unless top executives make a conscious effort to stay close to their customers, it is easy for these executives to mentally get out-of-touch with their customers. They will project upon their customers the same type of lifestyle that they themselves live. As a result, they may start designing products or services that are only appropriate for the top 5% of society, rather than their true customers.

As we saw in the first story above, the wealthy executive who was considering leaving the business world lived in a neighborhood of other wealthy people and all of his friends were equally wealthy. As a result, he had a very distorted view of what it meant to be average. He could no longer imagine how a person could live on a truly average income because he had no exposure to these types of people. That was a shame, because he was in a business that catered to average, to slightly above average, income people.

In the second story, executives were relying on their wives as their gage of what the “typical” woman would do. Of course, their wives were not typical. They had access to far more money than the average woman. They typically did not work outside the home as most women now do. Some of these executive wives had servants to help them around the house, something the typical woman does not have, either. Because their wives are not in the targeted customer segment of Wal-Mart, it is no wonder that they did not like the store. However, to assume that because executive wives do not like Wal-Mart, nobody will like Wal-Mart is to be blind to the realities of the marketplace.

This situation is like the airline story. If you are in first class, it is almost impossible to see what is happening behind you in coach class. First, the seats and seatbelts are not designed for looking back. Second, the flight attendants typically close a curtain or door between first class and the rest of the passengers.

Those in first class live in a world far better than those in coach:

    • Wider Seats
    • More Leg Room
    • Better food with real dinnerware (these days, coach often does not even get a meal, even if first class does)
    • Better, more personalized service

If you ever counted the seats in a typical airplane, you’d find that there are probably at least ten times more seats allocated to coach than to first class. That’s because the majority of the people flying cannot afford the luxury of first class. The first class passengers may only be able to see each other, but that does not negate the fact that they are in the minority on that plane.

The flight attendants say that the best exit path for you may be behind you. Similarly, the best path for finding your business strategy may be by looking behind you at people who are not living the life of “first class.”

The Principle
Before one can create a great strategic plan, one must first understand the environment in which the plan will exist. If you make the wrong assumptions about the environment, your strategy will probably have bad assumptions as well. One of the most important goals of the environmental analysis is to deeply understand your customers:

    • How do they live?
    • How do they think?
    • What are the fears and anxieties in their lives?
    • What brings them joy?
    • What motivates them to act?
    • Why do they purchase the things they purchase, in the way they purchase?

Granted, one can get some of this information out of consumer research. But typical consumer research can tell only part of the story, especially if the reader of that research has no personal connection to that customer, and thus, no context for understanding the deeper meaning behind the numbers.

True strategic insight comes when one understands the nuances behind the thoughts and emotions of their customers. This can typically only come from spending time in direct contact with the customer.

There are many ways to help build a deeper connection to your customers:

• Get out of the office and go hang out in the neighborhoods where your customer lives. Go into their homes and watch them interact with your product or service.

• Have your company conduct focus groups with your customers and go out and watch them in person behind the two-way mirror. If you feel comfortable with it, perhaps you could do the interviewing yourself.

• Cultivate friendships with people who are less like you and more like your typical customer.

• Join clubs, associations, or organizations like churches, which have a more diverse membership than you would find in your normal business day. This does not include belonging to the local country club. The typical country club is still too exclusive to show you what “average” is all about. It’s like thinking the executive wife is an “average” housewife. Free advice from your country club friends about what the customer wants is typically worth what you paid for it and nothing more.

• Go on sales calls with your sales force to see first hand how your customers interact. Better yet, do some of the sales calls on your own.

• Spend time listening in to the complaints coming into your call center. Better yet, spend time answering some of the calls yourself.

The more contact you have with the customer, the more the consumer research will come alive, because you will have a greater context for understanding it. Your environmental analysis will be more meaningful, resulting in the ability to create strategies that are more relevant.

The best strategies are those that find a profitable way to serve a particular customer segment better than anyone else. Because top executives are so well compensated, they are typically living a lifestyle very different from most of the customers they are selling to (or the customers of their customers, if they are OEM manufacturers). As a result, it is easy for these executives to get out of touch with their customers. When that happens, these executives may make poor assumptions about their customers, leading to poor strategies which would only work if the majority of the population was as wealthy as they were.

Therefore, executives need to find ways to keep in touch with their customers though direct personal contact.

Final Thoughts
One time I was having dinner with a wealthy CEO who made more money from his job in two weeks than the average family would make in an entire year. That would put him well into the top 1% in income, not to mention the money he made from investments and serving on the boards of other companies. Yet he considered himself to be middle class. At this dinner, he was complaining about those whom he called the “rich people”—people who made even more money than he did. At one point in the conversation, he said, “Rich people are out of touch and they don’t get it.”

I looked him straight in the eye and replied, “You’re right. Rich people don’t get it.”

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