Strategic Planning Analogy #261: How Does It Feel?

THE STORY
Back when I was a teenager (in the 1970s), muscle cars were all the rage (especially if you were a teenager). These were gigantic hunks of metal with massive engines. They shouted of power. They had names like GTO, Barracuda, Javelin and so on.

One of the distinctive features of these muscle cars was their paint job. No dull and boring colors need apply. They were bright yellows, bright oranges, bright purples and bright reds. They looked like shiny plastic toy cars…only a lot bigger.

Of course, nowadays, cars truly are made of plastic and other non-metal parts. However, you could not tell by looking at the paint job. Most of the cars of today seemed to be painted in metallic colors, like gray and silver and copper. Even when other colors are used, they often have metallic flakes in the paint to give it more of a metallic look.

So why is it that when the cars were made of metal, we made them look like plastic, but when the cars are made of plastic, we make them look like metal?

THE ANALOGY
The automobile industry understands the importance of appearance. Just being a good car is not enough. You also have to look the part. Fast muscle cars are like “toys for older boys.” The plastic colors helped reinforce that image. It makes them feel more “fun.” By contrast, today’s cars are all about quality and durability. The illusion of metal helps reinforce that image.

Image is not just important to automobiles. Every strategy should have an image component. And every image is reinforced by visual cues, even if the visual cues have little to do with actual performance.

Is a plastic car any stronger because is has a metallic paint job? That depends on whether you ask the automotive engineer or the customer. The engineer would say no, but the customer seems to feel more secure in the strength when the appearance is metallic.

Are you adding the right visual cue to your offering to evoke the image most relevant to your strategy?

THE PRINCIPLE
The principle here is that reality lies in the mind of the consumer. If bright, plastic colors make muscle cars seem more fun in the mind of the customer, then one should use bright plastic colors. If metallic colors make a plastic car feel more durable in the mind of the customer, then metallic colors should be used.

It doesn’t matter what rational measurements say. What matters is how customers feel. Strategic positions are not just held by rational measurements, but also by whether the position “feels right” in the customer’s mind.

Principle in Action
If you are a bank, you probably want a strategic position which includes being strong, stable and secure. That’s why banks tend to be located in brick buildings, rather than ones with cheap plastic siding. The physical reality of bank security may have nothing to do with bricks versus plastic siding. But in the mind, bricks make a bank seem much more secure.

When I was younger, I was hanging out at a shopping center that had a bank in it. It was a nice, sturdy brick building (or so I thought). I accidentally kicked the building and a piece of the thin brick façade fell off, exposing chicken wire and a little plaster. It was all a fake. Suddenly, my opinion of the security of that bank went down. It was all emotional, based on the illusion of fake bricks. When the visual cue broke down, so did my opinion. It didn’t matter that the reality of what was happening inside the bank had not changed. The opinion in my mind changed, and that is all that matters.

A similar principle applies to lawyers. A lawyer may not be any smarter if they are sitting in a plush, ornate office, but it sure feels like it.

To reinforce the strategy, everything should have an appearance which reinforces the image behind the strategy. For example, Apple owns the position of cool. They do it by making sure EVERYTHING is cool. Sure, the technology is cool, but so is the user interface, the esthetic design, the advertising, the software/apps, and even the store you buy it in. Everything helps to reinforce the coolness of everything Apple. As a result, it makes the people who use Apple products feel more cool.

Many of Apple’s competitors stop at just trying to make the technology cool. That’s not enough when all of the other visual cues are telling customers that Apple is cooler.

The cues don’t have to be rational…just effective at the mental level. For example, I worked with a grocer whose strategy was based on having an image of low prices. Through research, they determined that having employees bag the groceries lowered costs, because it sped up the checkout line, requiring fewer cashiers. Lower costs would help create lower prices, right? So what did the company do?

Rather than using baggers, the store used the less efficient process of having the customers bag their own groceries. Why? Because the visual cue of bagging groceries yourself created a greater mental perception of “low price” than would arise if the efficiency of baggers was applied to actual prices. Baggers do not “feel” like low price, even if they are.

What to Do
So what is a strategist to do? First, come up with a compelling strategic position. Second, determine which attributes reinforce that position. Third, make sure there are enough practical attributes imbued in the product to deliver on the promises inherent in the position. Fourth, surround the offering in visual cues so that every experience reinforces the mental perception of delivery on the promise.

When I say everything, I mean everything. If a customer has to call your customer service line, will that experience reinforce what you stand for? Do you ever consider the customer service line when designing the strategy?

Even if it doesn’t make sense from a rational perspective, if it helps with mental persuasion, do it. If needed, make the plastic car look like sturdy metal or the metal muscle car look like fun, colorful plastic.

And remember, although the smoke and mirrors are important, the product still has to deliver. A cool environment will not save an electronic gadget whose internal technology sucks.

Spend some time trying to experience the entirety of your offering, just like a real customer. Don’t just have someone in your firm take a product off the assembly line and dump it in your lap. Take time to try to purchase it just like a customer would. Try to set it up and use it without having one of your tech people or engineers in the room. Call to complain and hear what the response is. Experience all the image cues.

SUMMARY
Strategies are won or lost in the minds of the customer. These minds are influenced by all sorts of visual cues. The better you are at incorporating the management of all of these cues into your strategy, the greater the likelihood of success.

FINAL THOUGHTS
When you are in a strategy meeting debating tactics and actions, continually ask yourself this question, “How does that make me feel?” If it doesn’t feel right or feels inconsistent, then it probably shouldn’t be done, no matter how rational it first appears.

Strategic Planning Analogy #260: Are You Better Off?

THE STORY
Back in 1980, it was a close presidential contest between current president Jimmy Carter and former governor Ronald Reagan. Even just a few weeks before the election, there was not a clear leader.

It was hoped that some televised presidential debates would help people make a choice. Unfortunately, there was a split between how to handle third party candidate John Anderson. Reagan wanted Anderson in the debate; Carter did not. This argument caused them to miss deadlines for the debates.

Finally, with a little over a week before the election, Reagan wanted so badly to get in a debate that he caved in to all of Carter’s demands. So on October 28, 1980, Carter and Reagan debated in Cleveland, Ohio.

Ronald Reagan’s closing remarks at the debate were, "Are you better off now than you were four years ago? If so, I encourage you to vote for my opponent. If not, I urge you to vote for me."

Given the Iran hostage crisis, the weakening economy, and rising inflation, it appeared that most felt they were not better off than four years ago. As a result, immediately after the debate, public sentiment moved largely in favor of Ronald Reagan, and he won by a comfortable margin.

THE ANALOGY
Recently, there was a discussion on Linkedin about the sad state of strategic planning. During the current recession, it seems that strategic planners were often in the first wave of people let go. Not only that, recent unpredicted and unexpected events, like the housing slump, the debt crisis and the stock market slide had made people lose confidence that one can ever have much insight or influence over the future.

Finally, there was so much emphasis on near-term survival, that any talk of long-range planning seemed out of place in many companies. People were starting to believe that things change too fast and are too unstable to create any kind of meaningful long-range plan. The entire idea of strategic planning was starting to look out-of-date and useless.

Although I disagree with the conclusion, I can certainly understand the dilemma. To me, it goes back to the 1980 presidential debate. Business leaders were asking themselves a version of the question posed by Reagan: Is my company in 2009 better off now than it was several years ago?

The answer for most is “no.” Sales have plummeted. Profits have vaporized. Stock prices are down. Bankruptcies are up. By almost any measure, things are worse than before.

Now isn’t it the role of strategic planners to be the ones focused on improving the long-term prospects of the business? If the future is getting worse, then it would appear they are not doing their job.

Therefore, just like in the 1980 presidential election, companies are answering the question by throwing out the incumbents (the strategists) and are moving in a new direction.

THE PRINCIPLE
The principle here is that if strategists want any respect (and want to keep their jobs), they need a favorable response to that question: Is my company better off than before? Or to put it another way, is my company’s future any brighter because of the strategic planning efforts we have taken? If not, Reagan’s approach would say to kick out the strategists.

Granted, the current recession is so deep and so global that almost everyone is worse off, regardless of strategy. But has your strategy at least made you less worse off than your competition (are you gaining an edge on them)?

That has been the situation for the Ford Motor Company. Years earlier, it could see what was coming and built a strategy that acted early to get in front of the problem. They refinanced their debt when that was still relatively easy to do. They sold the weaker divisions when there was still a relatively healthy market for selling them. They got leaner and meaner in preparation for tougher times. As a result, Ford may not be having great times today, but they are gaining share and are better positioned than many of their competitors.

Now, it might seem obvious that strategists should measure themselves on how well they are helping to steer a company into a better future. Yet, when I look at what strategists get busy with, that does not always appear to be a priority. Here are some ways that strategists keep busy at tasks that are only tangentially related to creating better futures.

1) Scribe
Yes, it is important to get all the words and numbers written down. Things need to be quantified and clearly described. Accountability requires it. But if most of your time is spent just getting things written down and organized, you are not adding much value to the process. A stenographer or an administrative assistant can pretty much do that.

After a certain point, any improvement in the way words and numbers are written down will not improve the quality of a company’s future. And that point is fairly low on the quality spectrum. Instead, the place where quality time should be is on the ideas and activities behind what is written down. How much influence are you having on crafting the content of what is written? How much time is spent making sure business activities are bringing the content into reality? Don’t just blame the ops people for bad implementation of brilliant words. If you act as nothing more than a scribe, you should expect poor implementation.

2) Oracle
Yes, visionaries can be critical to success. And yes, one often needs to see into the future before one can optimize it. But if visioning is where you stop, then it is not very useful. Unimplemented ideas are like money hidden under a mattress. If it is never spent, then you live like a pauper, no matter how rich you are. You never benefit from it and may as well be poor for all the good the money did. Ebenezer Scrooge may have had money, but he did not have prosperity of life.

If you want a better future, then time must be spent in applying the insights of the oracle. Just being smart is not enough. In fact, studies have shown that B+ students make for better entrepreneurs than A students. B+ students tend to work harder in real life, while A+ students are too satisfied in just being smart and resting on idea-making that doesn’t go anywhere.

3) Activities Director
On the old Love Boat TV show, Julie was the activities director on the cruise ship. Her job was to make sure that there were lots of activities going on (on schedule with no problems) and that people were happy doing something. Sometimes we can get busy doing things like Julie. We spend so much time making sure the activities of the planning cycle go smoothly (the various discussion meetings, the filling out of paperwork, the approvals, the offsite planning meetings, the communication meetings, etc.) that we lose sight of why all that stuff is being done in the first place.

Perfect meetings do not always lead to perfect futures. I’d rather have a sloppy process that creates real substance than a flawless process that nobody treats seriously. True planning is not the process of managing the planning cycle. You can hire meeting coordinators for that. True planning is managing the quality of what comes out of the process.

Better Ways to Be Busy
If you want to have a meaningful part in creating a better future, focus your busyness on three things. First, help people get an accurate understanding of their true condition. Provide knowledge and insight that makes them smarter about what the situation is. Break down inaccurate biases. If your people have an unrealistic bias about what your condition is, then you will create a strategy that is inappropriate for true reality.

Second, control the debate. Make sure the tough questions are addressed and true out-of-the-box thinking is going on. Stretch the minds. Help people see the long-term consequences of near-term actions. Help people to see beyond the status quo. Help people envision alternatives.

Third, don’t hand off all responsibility once the ideas are on paper. Be active in making sure tasks get done. Monitor actions to make sure they stay on track. Keep people accountable. Make sure the long-term agenda does not get lost in the tyranny of the immediate fires which scream for attention. Scream back at them.

If you focus on these three tasks, you should get a better answer when people ask if the company’s future is better off because you were there.

SUMMARY
When strategists get a bad reputation, it is usually because leaders do not see significant value being added by strategists in the creation of a better future. Therefore, it is in your best interest to focus your limited time on the activities which are most critical to creating that better future. Don’t let the allure of “busyness” in lesser activities lure you into thinking your job is complete.

FINAL THOUGHTS
Ever notice any of those employees who have mastered the art of “looking busy” in order to avoid doing real work? You probably don’t have much respect for them. Remember that whenever you start feeling content in the busyness of being a scribe, oracle or activities director.

Stall Points

Question
Every month, Professor Jim Heskett of the Harvard Business School poses a question on the internet. This past month’s question was this: According to the book Stall Points, the authors found that growth rates for large companies: (1) increased up to the "stall year," (2) dropped precipitously in the following year, and (3) faced increasingly difficult odds of regaining momentum with the passage of time after the stall. Of the companies in the study, 87 percent had experienced a stall. Fewer than half of those were able to return to prior rates of growth within a decade after the stall. Why do these phenomena occur? Why do big companies, with access to people and capital, find it difficult to innovate and grow after becoming large?

You can read the whole thing here, including 81 responses to the question and Heskett’s summary which included a reference to my comment. But if you only want to see my brief comment, here it is.

My Comment
Two Concepts: Infestation and Cannibalization. First, when a company becomes large and successful, it attracts parasites, like moths to a flame. A parasite is an employee who is looking for a safe haven, a place already creating a lot of cash flow (which they want to tap into). They are not risk-takers. It is amazing to me how quickly a company can become infested with these parasites once the reputation gets out there. These parasites suck out the entrepreneurial drive.

Second, great new innovations succeed by obliterating the status quo. All of that "new" growth comes by taking share away from older industries and business models. When you have nothing, the rewards in reinventing an industry look huge--making the risk look worthwhile.

However, if you are now the market share leader, the reinvention ends up stealing from yourself (cannibalization). All of that reinvention looks like taking money out of one of your pockets to put into the other pocket. Why spend a ton of money and take a huge risk of destroying the core if the reward is the hope that you will get back all the share you already had?

To avoid the stall, a company has to diligently fight against parasite infestation and accept the virtues of self-cannibalization, realizing that it is better to cannibalize yourself than to have an outsider do it to you.

I am reminded of the SS Kresge company in the 1960s. They knew that for their new Kmart division to succeed, they would have to destroy the Kresge variety store core. They were willing to cannibalize themselves, and Kmart thrived for decades.

Then, when the supercenter concept came about, Kmart's first reaction was to try to build a supercenter that did not take share away from the core Kmart stores (avoid cannibalization). This resulted in a disaster supercenter called American Fare, a short-lived phenomenon. This time, by trying to protect the core, they killed the future of the company.

Strategic Planning Analogy #259: Quant Jocks

THE STORY
The term “Quant Jock” refers to people who earn their living by being excessively good at developing complex analytics via the computer. Quant Jocks have been an integral part of the Wall Street financial community for years. However, in the past year or two, their reputation for financial wizardry has become a bit tarnished.

First, it was the quant jocks who helped develop all of those sophisticated repackaged mortgage bundles, which nobody really understood and which were a major factor behind the recent housing crisis. Second, it was the quant jocks who developed sophisticated computerized stock trading programs. These sophisticated stock trading programs helped to increase the negative impact of stock melt-down in the fall of 2008.

The irony is that the quant jocks had claimed that all of their sophistication would help to reduce downside risk. Instead, it now appears that their models actually increase risk, particularly if events fall outside the programmer’s narrow assumption parameters (which inevitably will happen).

THE ANALOGY
There are many similarities in the goals of Wall Street and of business strategists. Both are trying to find a way to optimize the blend between profitability and risk. The goal is to create as much profitability as possible within a particular risk tolerance.

For years, Wall Street has used a lot of quant jocks in the attempt to achieve that goal. Now, we are seeing more and more of that complex analytical approach being applied to strategic planning’s goals. Planning techniques like Scenario Planning and Real Options seem to be falling under the influence of quant jocks.

At its worst, overly-quantified scenario planning can become similar to those mortgage-backed securities which helped bring down the housing market (if the quant jocks are allowed to go wild). You bundle up all these scenarios into one massive computer program and come out with some sort of bundled scenario risk formula that doesn’t quite match any particular scenario. This makes it hard to know what to do.

The same can happen to a Real Options approach to minimizing risk—lots of math leading to conclusions that tend to mask what is actually going on in a strategy. If the parameters are in the assumptions are off by too much, they whole thing can collapse.

It’s not that math or analytics are bad per se. Scenario planning and real options can be valuable tools. The knowledge and insight coming from rigorous analysis can be useful—on Wall Street and in strategy. But taken too far, analytics can obscure your view. Instead of knowledge and insight, there are incomprehensibles and too much blind faith in the cold, unthinking calculations of formulas inside a black box. And, as we saw in the story, rather than reducing risk, it can lead to increasing risk—and creating melt-downs. Is this what you want for your strategy?

THE PRINCIPLE
The principle here is that strategies need to be far more than just numbers and formulas. In fact, an excess of “quant jock” thinking can actually increase the risk of failure for your strategy. The logic behind this point of view are as follows:

1. Continuity Vs. Discontinuity
Quant jocks tend to live in a world of continuity. The idea is that the world operates by a set of rules. The role of the quant jock is to model those rules and optimize the nuances for the benefit of the company.

By contrast, good strategists tend to focus on discontinuities. Nearly all great strategic moves are done in a way that totally destroys the rules of the status quo. For example, the great success of the Ipod comes from more than just the creation of a device. It was a reinvention of the rules for the entire industry—of how music was sold (itunes), organized and listened to.

The same was true for the iphone—creating an entirely new apps-based business model. Amazon was not just another outlet for selling books—it was a new way to think about shopping, with lots of new tools and information to create a wholly different shopping experience.

As we saw with the housing crisis and the stock market melt-down, the quant jock systems failed miserably when there was great discontinuity. They weren’t built for such rapid change. I fear the same is true in the strategic world.

Rules-based models don’t help you discover a new set of rules, nor do they tell you how to react when the old rules no longer apply. Rather than overanalyzing the world of today, strategists should be dreaming of how to destroy the world of today for their benefit.

Instead of modeling the world as it is, we should model potential new realities. Yes, there is still some analytics involved, but the analytics are only as good as the dreams being analyzed. Great dreams are more important than great analytics, because the dreams are what create the new business models to be analyzed. Analytics without these dreams is just random noise.

2. Beating the System Vs. Being the System
In the stock market, the goal of the quant jock is to find little holes in the rules, so as to beat the system on very narrow deviations. Unfortunately, what happened was that a large number of firms adopted these models and started trying to beat the system in pretty much the same way.

When that happens, you are no longer beating the system. Instead, you become the system. The herd mentality caused so much trading to be done in this similar analytical manner, it became harder to make the models work (too many people chasing too few holes). Then, when the market fell apart in the fall of 2008, the models all worked in unison to force prices down further and faster.

A similar situation occurs in strategy. “Me Too” strategies, where you try to copy the leader, rarely lead to great riches. The leader usually stays the leader and you fight over the few crumbs left behind.

If the herd mentality takes over and everyone tries to win in the same way, it tends to commoditize the business. This usually leads to price wars, where the prices drop just like those stocks did (and so will your profits).

Analytics by nature tend to mimic others, because they are trying to model the world that exists. Quant jocks may come up with original ways to push around the math, but they rarely come up with original new strategic options. If you truly want to beat the system, you need to create a new position, working under a new set of rules—a place where you can be the leader and the rules work in your favor. Brainstorming, not whirring computers and complex spreadsheets, are the priority.

3. Creating Vs. Measuring
Quant jocks like to measure things. The problem is that when you are creating a brand new business model in a brand new space operating under a brand new set of rules, there isn’t much to measure beforehand.

If you wait until the market is fully developed, so that you have more to measure, it is usually too late. The market leaders have already established themselves and the rules are already working in their favor. The game is over.

Apple succeeds by blazing new trails, doing new things—be it the Ipod/Itunes model, the Iphone/Apps model or the Apple Store model. It doesn’t wait until the market is fully developed and measurable. It takes calculated risks. Sure, calculated risks are still calculated, but the strategy is not put on hold until perfect information is available.

Sometimes, a little consumer research can help. But even here, if the concept is too radical, the customers may not at first be able to internalize how they would behave in that new world, thereby making the results unreliable. Small beta tests may be better than analytical modeling.

Well, if the new world is not yet available to measure, we can always still measure the current model, right? Unfortunately, overemphasis on measuring the business model you are trying to destroy usually will not tell you the best way to destroy it. That’s a lot of effort for questionable reward.

SUMMARY
Strategy is primarily a creative act—building a new business model that did not exist before. A “quant jock” mentality/focus typically is not the path to get there. Instead, it tends to keep one mired in the past. Sure, a little analytics can help fine-tune the creative idea, but it won’t develop it. Therefore, rather than obsessing on analytics, obsess on creative model building and then use analytics as a secondary support mechanism.

FINAL THOUGHTS
Sir Isaac Newton did not discover gravity through analytics. It was a creative burst prompted by watching apples fall from trees. The analytics came later. Strategists should probably spend more time pondering things like falling apples and less time pouring over computer printouts.

Strategic Planning Analogy #258: Just Add Milk

THE STORY
When my children were small, they were very fussy eaters. One of the few things they liked to eat was macaroni and cheese from a box. We tried pretty much every brand available in order to find the type of macaroni and cheese they would like the most.

To me, all the brands looked about the same. The boxes were the same size. The macaroni inside was about the same size and the same amount. The powdered cheese packets were the same size and looked about the same. From my perspective, the only difference between the brands was the picture on the outside of the box.

However, there was one brand that was a little bit creamier and a little bit tastier. I wanted to know why. As it turns out, on every other brand, the instructions called for adding one-quarter cup milk to the powder. However, on the brand that tasted a little bit creamier, the instructions called for one-third cup of milk.

In other words, the only reason why that one brand was creamier was because I added more milk to it. I was the one making it creamier, not the manufacturer. After that, I bought whichever brand was on sale and just added extra milk. That made my children happy, so I was happy.

THE ANALOGY
Just as I was trying to make my children happy, businesses try to make their customers happy. And sometimes, those customers can be rather fussy, just as my children were.

To win over a fussy customer, one has to devise a strategy which provides a superior overall product versus the competition.

There are lots of ways to add value to your offering. Unfortunately, it usually costs a company more to provide that extra value, thereby lowering profits. However, what was fascinating to me about the macaroni and cheese was that the one brand found a way to provide superior taste without increasing its costs or its prices. Instead, it indirectly increased the costs of me, the customer, who had to add additional milk (at my expense).

It wasn’t a big extra cost to me (one-twelfth of a cup of milk), so I didn’t mind. But it allowed their brand to claim a superior attribute on “creamy” and appear to be the superior brand even though their contribution to the meal was essentially identical to the competition.

When devising a strategy, then, consider the example of this macaroni and cheese brand, which created superiority by getting someone else to add the extra value.

THE PRINCIPLE

The Importance of Trade-offs
Michael Porter, one of the foremost authorities on business strategy, likes to talk about how important trade-offs are to strategy. In fact, he believes that determining your trade-offs is one of the most critical strategic decisions one has to make.

The idea is that a company typically does not have enough internal resources to be the best at everything. Therefore they have to make a choice as to what narrower area they can be best at. Then, to create superiority in that area, you pile up your resources in that area, putting far less somewhere else. The big decision is the trade-off—where will you trade away strength, so that you can be even stronger somewhere else.

Even if you do have a lot of resources, there are constraints which can make it difficult to attain superiority in all areas. For example, it is pretty much impossible to create a bicycle that is simultaneously the fastest, the sturdiest and the cheapest. Fast bicycles tend to cut back on sturdiness in order to reduce weight. Or, if you want to get both light and sturdy, one has to use very expensive metal alloys which prevent one from being the cheapest.

Therefore, if you try for all three attributes in the same bicycle (fast, sturdy, cheap), you will probably not be the best in the market on any of them. It is better to focus on one of the three and then make trade-offs on the other two. That way, you are at least superior in something and can target your bicycle to the people who value that tradeoff the most.

Trade-offs Do Not Necessarily Have to Be Entirely Internal
The principle of this blog, however, is that these trade-offs do not necessarily have to be entirely internal. Sometimes, one can get others to make the trade-off on your behalf.

As we saw in the story, the macaroni and cheese brand got me, the customer, to make the trade-off for them. I sacrificed more milk in order to make their product creamier. This was great for the manufacturer, because they got a superior product without adding costs to their product. I was the one who added the value at my expense.

There are lots of ways to get your customer to make the trade-offs and add the value for you. For example, Home Depot knows that not everyone drives a vehicle that has the capacity to haul all those big and bulky products home. Therefore, Home Depot offers the use of a Home Depot pickup truck in order to get your products home. This is an added value that the little hardware store cannot offer. The trick is that they get you, the customer, to pay for that value. You have to rent the truck.

What a deal for Home Depot! They get to add value by adding a beneficial service (the pickup truck). But at the same time, they get you to pay for the value (another profit center for Home Depot). Better yet, now that you can haul more stuff home, you are more likely to buy more stuff, thereby increasing sales. Added value and added profits for Home Depot without Home Depot having to trade away anything.

Or how about those warehouse clubs, like Costco. These firms add value by having the lowest prices. How are they able to achieve the value of the lowest prices? It is by charging the customers annual membership fees. About three-fourths of a club’s profits come from those membership fees. In other words, the clubs get the members to make the sacrifice for the trade-off which creates the lower prices by having them pay the membership fee.

Better yet, Costco gets the profits up front, by charging the membership fee in advance. And the profits are guaranteed, and are not dependent upon how much the customer later purchases. And finally, since the member wants to get the most benefit from that membership fee, they feel obligated to spend more at Costco throughout the year, creating even more profits. That’s a pretty good deal for Costco, considering that the customer made the sacrifice trade-off for them.

In the first half of the 20th century, grocers would have all of the product behind a counter. Customers would go up to the counter and tell the grocer what they wanted and the grocer would collect it for them. Then, a fellow named Cullen got the idea for the supermarket, which offered prices a whole lot cheaper than the grocer. Part of the trade-off to get there was to give the customers shopping carts and to have them do the labor of selecting the products off the shelf themselves. Again, the customer took on some of the trade-off to fund the lower prices.

Don’t Forget the Others
Customers are not the only ones you can use to absorb some of your trade-off. The auto industry has shown us that sometimes you can get your suppliers to pay the price for your trade-offs through all sorts of concessions (although we have lately seen there are limits to how much they can bear). The airlines industry in the past has achieved trade-offs at the expense of their employees, by having pilots take a big pay cut. In the dot-com world, advertisers are often used to bear trade-off expenses so that a greater value can be given to the customer.

If you get creative, you can probably find lots of ways to adjust your strategy so that the burden of trade-offs are shared with others in the supply chain.

SUMMARY
Although trade-offs are an essential part of strategy, it is not a foregone conclusion that your firm has to carry the full burden of those trade-offs on its own. Sometimes you can get external partners, like customers, suppliers and employees to pick up some of the burden. By passing off some of the burden, you can afford to provide a superior value with less pressure on profit margins.

FINAL THOUGHTS
Perhaps, instead of calling it a “trade-off,” we should refer to it as a “trade-to.” In other words, instead of always looking at what we can eliminate, we should look to who we can pass the burden off to.