Friday, June 22, 2012

Strategic Planning Analogy #458: When Superior is Inferior

It seems like it isn’t good enough to just build an automobile.  Now it has to be an automobile plus something else.  Some cars are both automobiles and entertainment centers.  Some cars are both automobiles and communication/computer centers.

How about a combination car and kitchen?  After all, a high percentage of meals are already eaten in a car.  Why not cook the meals in the car as well?

I can see it now…When you try to start up the car, the dashboard has dozens of cooking icons all over it.  It takes forever to find the icon for driving.  And if you want to heat the car, you have to be careful, because if you turn the heating dial the wrong way it will turn on the oven or the stovetop coils above the dash.  And the legroom is cut in half to make room for the refrigerator.  And every time you press on the brakes, the dishes fall out of the cupboards and the saucepan falls off the stovetop, spilling hot liquid on your lap.  And if you want to cook at home, you have to do it in the garage, because all the appliances are in the car.

On second thought, the combination kitchen and car is not such a good idea after all.  Maybe the “More Features” approach doesn’t work so well afterall.

In the business world, there is a strategic approach which I refer to as “More Better.”  The idea is that if you take the status quo and either a) add more features, or b) make the current features perform better, then you have something superior to what you had before.  And this superiority will drive great market share gains and great profit improvements.

Sometimes, the More Better approach works.  However, in a large percentage of cases, More Better fails miserably.  You often end up with something like my kitchen car.  Sure, the kitchen car can do more than just a kitchen or more than just a car.  But is it really a superior offering when you put them together?

The combination kitchen car makes both driving and cooking a disaster.  Instead of making everything better, it has made everything worse.  It is now an inferior option.

But what about the “Better” approach?  What if we made the engine a lot better, so that the car could go 700 miles per hour (or about 1,125 km per hour, or roughly 3 times the average speed of the drivers of the Indianapolis 500)?  Does that really make the car better?  First, there is virtually nowhere where you could safely or legally drive at that speed, so the feature is pretty useless.  Second, the engine would weigh so much and be so inefficient that it would waste a lot of expensive fuel even at normal speeds.  And to fit such an engine in the car would require eliminating half of the car interior space.  And you probably couldn’t afford a car like that or its insurance.  So, in this case the “better” approach isn’t really better.

Yes, these may be ridiculous examples, but as we will see, even more seemingly rational attempts at More Better can create a disaster.

The principle here is that true superiority must be defined from the perspective of the consumer, not the product.   More Better is focused on WHAT THE OFFERING CAN DO (more features, better performance).  This does not necessarily lead to higher share or higher profits.  No, true superiority comes from convincing a customer that his/her problem is solved better.  It focuses on WHAT THE CUSTOMER EXPERIENCES.   And this includes the whole experience of purchasing, price paid, usage, maintenance, upgrades, feeling of status, and so on.  And in many cases, the customer experience is improved when the offering is less and not as advanced.

There are three main reasons why More Better frequently does not lead to increased share and increased profits.

1) Diminishing Returns on Investment
Back in the 1980s and 1990s, each new advance in the Intel chip and the Microsoft operating system were quantum leaps of improvement for the computer.  The usefulness and productivity enhancements with each stage were so large that people would rapidly abandon the old and adopt the new. 

But after the Windows XP era, things started to change.  Many businesses found out that the hardware and software associated with XP did pretty much everything most people needed to do in the office in a pretty efficient way.  As a result, when the next generation Vista came out (Windows Vista), a lot of companies did not automatically upgrade everything as they would have in the past.  They decided the XP was good enough for their needs and stayed with the old.

That’s part of the problem with focusing on improving features.  Eventually, the features get pretty good…good enough that additional improvements to the features have very little impact on consumer experience. 

Since XP, most of the Microsoft improvements have either been cosmetic or have involved tweaks on the fringes for features the majority of people do not regularly use.   It’s hard to justify purchases when the additional benefits have such little impact on an experience which was already good enough.

This is also happening all over the place with CPG (consumer packaged goods).  How much better can you make canned vegetables or peanut butter?  Will anyone even notice the difference in a taste test? 

In a lot of mature categories, needs are already met.  Spending tons of money on R&D to create small improvements may not be a good return on investment.  There’s a reason why P&G has sold off a lot of its mature categories—they no longer reacted well to the More Better mindset.

And the situation can be even worse when you try to add more features, because the new features can cancel out the old features.  There’s an old saying that you cannot excel at all three features of cheap, quality, and fast to market at the same time.  The reason is because becoming superior in any two of them makes it impossible to also excel at the third, because the very structural requirements needed to meet the two work against being able to attain the third.

In other words, the more features you add, the more your offering gravitates towards average across the board.  You no longer excel at anything, because the added features cancel out the consumer experiences.  You have actually made things worse.

2) Increasing Hurdles to Switch
Not only are there diminishing returns to improvements, there are increasing hurdles preventing consumers from wanting to adopt those improvements.  These hurdles include:

a) Pricing – The improved products usually cost more.  When you factor in the price, the total value experience may be worse than before.  Private labels are exploding in growth because consumers see a superior value.  The name brands cannot create enough superiority to justify the higher price.  P&G discovered that recently when they tried to raise prices and saw volume drop.

b) Switching Costs – Switching to the new item may require consumers to create new vendor relationships, learn a new way to operate, have difficulties in getting rid of old products and a warehouse of obsolete replacement parts, experience near-term cash flow issues, a loss in productivity as they learn the new product, and so on.  A product has to be more than a little bit better to overcome all of the negatives associated with switching.  Just ask the people competing against John Deere farm machinery.  The users love their relationship with the local John Deere dealer so much that even modest improvement by a competing brand leads to little market share movement, since the customers do not want to switch away from the dealers they love.  That is a key to total experience.

c) Added Complexity – “More” often means “more complexity.”  Complexity rarely improves consumer experience.  The complexity of a kitchen car makes cooking and driving worse.  Ford’s reliability ratings have recently gone down.  Is it because the cars don’t drive as well?  Actually, most of the decline is due to problems with all the added computerized communication features being added to the car.  The complexity is weighing them down.  Branding genius Al Reis says that convergence products rarely excel in the marketplace when compared to narrowly focused products.  The focused brands are the ones that win the war.

3) Consolidating Markets
Increasing market share requires lots of market share available to take.  In mature markets, that is not usually the case.  First, you already have a sizable share of the market (less available to incrementally gain).  Second, the weaker players are already gone.  The remaining share is mostly in the hands equally strong players who are doing More Better about as well you are.  Large, lasting, sustainable superiority is almost impossible to come by.  As a result, large sustainable gains in share are hard to come by.  So all that work and money on More Better doesn’t lead to corresponding gains in share or profits.

During the great recession, Walmart tried a massive price rollback to gain share.  The problem was that they already owned most of the customers most susceptible to low prices.  So very few new customers were added by the move.  And since the current customers also benefitted from the lower prices, the total sales per store went down.

So when you add up these three factors—decreasing returns, increasing hurdles, and consolidating markets—you can see how the More Better strategy by itself can destroy value.  It leads to products that may have more features and better specs, but often diminishes the value to consumers while increasing your costs of business.  Rather than trying More Better with status quo offerings, you may be better off moving to totally new approaches which use a wholly different business model to solve customer problems.

Digital downloads of music are replacing sales of music CDs, even though the music on a CD is of a measurably superior audio quality.  Even though New Coke had superior specs when it came to taste, it lost out to the supposedly inferior tasting Classic Coke.  In both cases, the superior quality product lost out because it did not create a superior total consumer experience.  Never forget that.    

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