Saturday, April 2, 2011

Strategic Planning Analogy #385: Truthful Exaggerations

My wife doesn’t like it when I exaggerate. When she starts getting on my case and criticizing my exaggerating, I like to answer as follows:

“Oh, no. I never ever, ever, ever, EVER, E-V-E-R exaggerate. I’ve never ever exaggerated in my whole, entire life.”

Somehow, she doesn’t see the humor in that response like I do.

I think the reason why my wife doesn’t like my exaggerating is because she sees it as similar to lying. But what if you could exaggerate and tell the truth at the same time?

Businesses can do this. They can exaggerate their business model in one of a variety of different directions. For example, a business could exaggerate its product assortment. They could make it much broader, significantly narrower, more distinctive, or far more customized than the typical company in their industry. Similarly, they could exaggerate service levels, prices, features, and so on, relative to everyone else.

Then, a company could tell the world about the benefits of that exaggeration. In doing so, they would be talking exaggerations and telling the truth at the same time. I think even my wife would be okay with that.

The principle here is that you will never achieve above average results if you act like everyone else in your industry. Having a business model just like everyone else will make you, by definition, average. If you want superior results, you have to do something different. You have to exaggerate the industry business model to the extent that:

a) Customers will perceive you differently from other industry players (enough to change their expectations of how to interact with you);

b) You can exploit the inherent difference caused by the exaggeration in a manner which allows you to tap into extra profit opportunities that the rest of the industry cannot imitate.

Allow me to demonstrate this with a couple of examples.

Save-A-Lot is a large chain of limited assortment hard discount grocery stores. It is very similar to Aldi. Save-A-Lot is very different from the traditional supermarket because of its exaggeration related to assortment. Save-A-Lot carries only a small fraction of the number of items (called stock keeping units, or SKUs) found in a typical supermarket. Typically, there is only one brand in each category, like one brand of peanut butter, one brand of ketchup, one brand of canned vegetables. And that one brand is a private label controlled by Save-A-Lot.

Service levels are also exaggerated—much less than a typical supermarket. You have to purchase your shopping bags. You have to bag your own groceries. The stores are typically not open as long as a traditional supermarket. There is nobody there to make you a custom cut of meat.

Because of these exaggerations in assortment and service, Save-A-Lot has a much lower operating cost than a typical supermarket. This allows them to charge much lower prices and still make a good profit.

The customer sees that Save-A-Lot is obviously not playing the same game as a typical supermarket. The stores are much smaller, they don’t carry everything, the brands are unfamiliar, and the prices are a lot lower. The customer is willing to accept a selection and service level they would never tolerate from a traditional supermarket, because they see it as a fair tradeoff to get the lower prices that they cannot get from a supermarket.

Save-A-Lot has permission to shout about having exaggerated low prices, because the exaggerated business model makes lower prices possible. In other words, this is an exaggerated statement rooted in truth, something my wife can accept.

This exaggeration allows Save-A-Lot to tap into profit opportunities unavailable to traditional supermarkets. I remember talking to Bill Moran, founder of Save-A-Lot about this. He said the following:

“The beauty about being a limited assortment store is that people do not expect you to carry everything. As a result, I only need to carry those items I can make a profit on.”

In other words, the exaggeration allows him to avoid carrying a lot of the loss-leaders which customers expect traditional supermarkets to carry. The example Bill Moran gave me was jars of baby food. He said that in some markets, jarred baby food is priced at a loss. In those markets, Save-A-Lot carries no jars of baby food. In other markets, baby food is priced more normally, so in those markets he carries his private label baby food, where he could under-price the supermarkets and still make a profit.

Another example is Kraft Velveeta cheese. Bill Moran could never find a way to make a private label version of Velveeta which tasted as good and could profitably under-price Velveeta. As a result, Save-A-Lot has no Velveeta-like cheese. When customers ask why Save-A-Lot doesn’t carry a Velveeta-like cheese, he would tell them that he couldn’t find a way to give them a value on the product. If he had to carry it, he would have to raise the other prices in the store to make up for it. Because customers know that Save-A-Lot is a Limited Assortment store (and they appreciate the drive to keep prices low), they accept the explanation and are happy.

Now think of what would happen to a traditional supermarket if they told the customer they didn’t carry their favorite brand because they couldn’t make a profit on it. The customers would have a fit, because they expect a full assortment from supermarkets. In fact, back in 2009 and 2010, Wal-Mart tried to cut way back on the grocery assortment in their superstores. The customers got angry and took their business to the competition. Wal-Mart lost market share. Eventually Wal-Mart had to go back and add a lot of those items back to their mix. Wal-Mart could not use the same profit tactic as Save-A-Lot, because they had not exaggerated the business model enough to get permission from the customers to do so.

And, by the way, Save-A-Lot is one of the more profitable parts of the Supervalu corporate portfolio, a portfolio which includes traditional supermarkets. It creates above average results because it does something different with the business model (made possible through exaggeration).

Southwest Airlines
Southwest Airlines is another company operating under an exaggerated business model. The key point of exaggeration is that they only do point-to-point flying. In other words, Southwest will not book you through on multi-stop flights. They do not use the traditional hub-and-spoke approach to create a lot of flight connections. If you need to make a connection on Southwest, you have to go pick up your bags and re-check them in. You also have to go through the ticketing process again.

Southwest uses this point-to-point exaggeration (a few other similar exaggerations) to create a meaningfully different business model, which they can exploit in a manner which allows them to be more profitable while still charging far lower prices. Customers believe them when Southwest shouts about their lower prices, because they know they do things differently in a way that justifies the lower prices. It is not just a price war. It is a true pricing differential caused by a true costing differential. This is truthful exaggeration.

Let’s just look at one aspect of this. In a point-to-point system, every bag on a plane has the identical journey. Baggage for a Southwest plane all comes in from that airport’s baggage drop off. There are no transfers from other planes to that plane. Similarly, all the Southwest baggage leaves a plane and goes to the same place, the baggage pick-up area. None of it is transferred to another plane. This makes the cost of running baggage for Southwest far lower than for a traditional airline, which has transfers of baggage going all over the place, even to competitor’s planes.

As a result, while other airlines feel a need to charge high fees for checking baggage, Southwest can brag that bags fly free. Southwest did the math and found out that because their baggage costs are so low (due to the exaggerated business model), they can afford to do baggage for free because it created enough extra market share to more than cover any losses due to not charging for bags.

And it should also be pointed out that for decades, Southwest has been far more profitable than then average US airline. By being different, they can tap into profit opportunities the traditional operators cannot touch.

Hollow claims are not the path to superior results. If you want above average results, you need to act differently from the rest of the industry—you need to exaggerate the business model in a meaningful way. These exaggerations change consumer perception and business processes in such a way that you can tap into extra profit opportunities unavailable to the rest of the industry.

Take a tip from my wife: If you want to get away with saying an exaggeration, first you had better BE an exaggeration. Otherwise, you are just a liar. Truthful exaggerations are the way to go. Are your strategies based on truthful exaggerations?

1 comment:

  1. Gerald Nanninga,

    I would make this slogan based on my understanding of your post

    Exaggerate to differentiate

    This is a different way of differentiation strategy.

    I liked this post very...very....very much