Art of Retail Management -- Habit: Fixing the Fix You're In
In two previous articles, I
described how the primary objectives of flooring dealers actually compete
against each other: Sales compete against Profitability, and Short-term
Earnings compete against Long-term Earnings.
If you’ve followed me, you’ve calculated your company’s batting averages
for these two sets of competing objectives over the past five years, and you’ve
identified which set is hurting your company. You’ve finished Steps One and Two
and now you’re ready for Step Three.
This is where you learn how you can prevent your objectives from
competing against each other. You can start letting them work together. This
way, they both improve at once.
The key to turning competing objectives into cooperating objectives was discovered by two executives of Marakon Associates, an international consulting firm. Dominic Dodd, a director, and Ken Favaro, Marakon’s co-chairman reported their study in “Managing the Right Tension,” Harvard Business Review, Dec 2006. In their study of 1,000 companies over a 20-year period, Dodd and Favaro observed that most managers simply pick one of the two competing objectives and push it. They found this common-sense solution failed. It led to frequent switching from one objective to the other, which confused employees, and generated sub-par growth in both objectives. A better approach involves finding common ground between the competing objectives. When managers identified that force and strengthened it, they could successfully grow both objectives at the same time. Neither had to be sacrificed for the other.
The authors suggest that a force common to both sales growth and profitability is customer benefit. A force common to both short-term and long-term economic profit is sustainable earnings.
Customer benefit is the reward that customers sense when they experience your brand, your products and your services. Dodd and Favaro wrote: “If a product has a high customer benefit, customers will be willing to share a greater burden of making it profitable for the company. They are likely to consent to a high price for a high benefit; they will be happy to do some of the marketing and advertising to new customers for you through word-of-mouth recommendation; you will not need to persuade them so aggressively to keep buying…. [Sales] growth based on customer benefit is clearly more likely to be compatible with profitability. What’s more, reducing the costs that are unnecessary for improving customer benefit-'bad costs'-will deliver higher profitability without damaging growth.”
Consider these ways to improve your Customer Value Proposition (CVP). Which benefits do you offer? Are they distinct from the competition? Are these benefits appreciated by your most valuable customers? Make a list of them. What could you add to that list that will prompt your customers to pay even more? Select features that customers will remember when they ask themselves, “What’s important when buying flooring?” You want to select one or two features, but not more than three that they can hold in their minds. They should be resonating, critical, valued features. Remember, customers will not value your proposition if they believe they can get the same offering down the street. Similar offerings they will price-shop. So, add features that:
• Competitors cannot match. Study their ads and websites. Shop their stores. Your features must be both different from, and superior to, the competition.
• Your best customers will value most. Do not try to be all things to all people.
• Customers can measure or see or feel.
• You can sustain for the long term. Install systems to insure consistent execution.
Next, look for ways to articulate your improved CVP. Make your message uniform in every marketing piece. Carefully select the media that can best connect with your target consumers.
When you can paint a picture that brightly displays the distinctive value of your package of products, services, and integrity, and when consumers and your employees believe your package beats the value of any competitor’s offering, your salespeople can sell that value. They will convey their conviction of your value to price-shoppers.
You can then set your prices high enough to lay a solid financial foundation for your company. We recommend you not just raise prices on products. Instead, raise prices on the CVP features that customer value.
Next, weed out unprofitable transactions. Even when your company has a profitable year, I’ll bet you took a hit on some transactions. It pays to probe deeply into your data, examining job-costs by product type and customer type, until you identify which products and which customers brought you these losses. When you identify these losses, decide whether to raise your price to make such sales profitable, or to eliminate them altogether.
Sustainable earnings are the force that propels both short-term and long-term earnings. Sustainable earnings don’t borrow from the past by milking a business model that no longer produces optimal results, nor do they borrow from the future by pushing a sales campaign that has no staying power. Sustainable earnings flow from a sustainable competitive advantage. What’s yours?
Dig deep! Ask, “Which of the forces pushing our earnings are sustainable?” Re-examine the areas you’ve invested in-your showroom, displays, warehouse, advertising, inventory, and the work-processes you pay employees to do. Ask yourself and your employees, “When we invested in each element, which customer benefits did we hope to attain?” Discuss the potential power of each element. Then ask: “How well is each one actually returning earnings on our investment? How much more might each element generate if we increased our investment in it? How much value would we lose if we decreased our investment? Are all these elements working in harmony to build the store we want in five years?”
Look for a return on investment that will sustain solid earnings for the next three to five years. The CEO of Gillette, Jim Kilts, once said, “If you achieve just above median performance year in and year out, you will be number one over five to ten years. If you seek to be No. 1 year in and year out, you will do things that wreck the business. People get this wrong all the time.” (Quoted in Dodd and Favaro’s article.) In other words, avoid the temptation to achieve high short-term earnings (in order to be number one in your market) that you know you cannot sustain. Rather, every year, work to perform better than the average competitor. That goal will push you to sustain earnings year to year. (Mr. Kilts applied this advice to build his company’s value quickly. In February 2001, when he took over as chairman and CEO, the company’s market value was $34 billion. Just 4.5 years later, Proctor & Gamble bought the company for $57 billion.) What level of earnings growth is just above your market’s median?
Dodd and Favaro conclude that emphasizing one objective over its counterpart does not improve performance, except for start-ups, exits, and performance crises. They advise business owners not to prioritize between objectives within a set, but to prioritize between sets. Pick the appropriate tension-set for your company (Step Two); then build the force common to both objectives in that set (Step Three). Do this and you will be fine.
I welcome e-mail from you about how you applied these principles for managing your competing objectives.
The key to turning competing objectives into cooperating objectives was discovered by two executives of Marakon Associates, an international consulting firm. Dominic Dodd, a director, and Ken Favaro, Marakon’s co-chairman reported their study in “Managing the Right Tension,” Harvard Business Review, Dec 2006. In their study of 1,000 companies over a 20-year period, Dodd and Favaro observed that most managers simply pick one of the two competing objectives and push it. They found this common-sense solution failed. It led to frequent switching from one objective to the other, which confused employees, and generated sub-par growth in both objectives. A better approach involves finding common ground between the competing objectives. When managers identified that force and strengthened it, they could successfully grow both objectives at the same time. Neither had to be sacrificed for the other.
The authors suggest that a force common to both sales growth and profitability is customer benefit. A force common to both short-term and long-term economic profit is sustainable earnings.
Customer benefit is the reward that customers sense when they experience your brand, your products and your services. Dodd and Favaro wrote: “If a product has a high customer benefit, customers will be willing to share a greater burden of making it profitable for the company. They are likely to consent to a high price for a high benefit; they will be happy to do some of the marketing and advertising to new customers for you through word-of-mouth recommendation; you will not need to persuade them so aggressively to keep buying…. [Sales] growth based on customer benefit is clearly more likely to be compatible with profitability. What’s more, reducing the costs that are unnecessary for improving customer benefit-'bad costs'-will deliver higher profitability without damaging growth.”
Consider these ways to improve your Customer Value Proposition (CVP). Which benefits do you offer? Are they distinct from the competition? Are these benefits appreciated by your most valuable customers? Make a list of them. What could you add to that list that will prompt your customers to pay even more? Select features that customers will remember when they ask themselves, “What’s important when buying flooring?” You want to select one or two features, but not more than three that they can hold in their minds. They should be resonating, critical, valued features. Remember, customers will not value your proposition if they believe they can get the same offering down the street. Similar offerings they will price-shop. So, add features that:
• Competitors cannot match. Study their ads and websites. Shop their stores. Your features must be both different from, and superior to, the competition.
• Your best customers will value most. Do not try to be all things to all people.
• Customers can measure or see or feel.
• You can sustain for the long term. Install systems to insure consistent execution.
Next, look for ways to articulate your improved CVP. Make your message uniform in every marketing piece. Carefully select the media that can best connect with your target consumers.
When you can paint a picture that brightly displays the distinctive value of your package of products, services, and integrity, and when consumers and your employees believe your package beats the value of any competitor’s offering, your salespeople can sell that value. They will convey their conviction of your value to price-shoppers.
You can then set your prices high enough to lay a solid financial foundation for your company. We recommend you not just raise prices on products. Instead, raise prices on the CVP features that customer value.
Next, weed out unprofitable transactions. Even when your company has a profitable year, I’ll bet you took a hit on some transactions. It pays to probe deeply into your data, examining job-costs by product type and customer type, until you identify which products and which customers brought you these losses. When you identify these losses, decide whether to raise your price to make such sales profitable, or to eliminate them altogether.
Sustainable earnings are the force that propels both short-term and long-term earnings. Sustainable earnings don’t borrow from the past by milking a business model that no longer produces optimal results, nor do they borrow from the future by pushing a sales campaign that has no staying power. Sustainable earnings flow from a sustainable competitive advantage. What’s yours?
Dig deep! Ask, “Which of the forces pushing our earnings are sustainable?” Re-examine the areas you’ve invested in-your showroom, displays, warehouse, advertising, inventory, and the work-processes you pay employees to do. Ask yourself and your employees, “When we invested in each element, which customer benefits did we hope to attain?” Discuss the potential power of each element. Then ask: “How well is each one actually returning earnings on our investment? How much more might each element generate if we increased our investment in it? How much value would we lose if we decreased our investment? Are all these elements working in harmony to build the store we want in five years?”
Look for a return on investment that will sustain solid earnings for the next three to five years. The CEO of Gillette, Jim Kilts, once said, “If you achieve just above median performance year in and year out, you will be number one over five to ten years. If you seek to be No. 1 year in and year out, you will do things that wreck the business. People get this wrong all the time.” (Quoted in Dodd and Favaro’s article.) In other words, avoid the temptation to achieve high short-term earnings (in order to be number one in your market) that you know you cannot sustain. Rather, every year, work to perform better than the average competitor. That goal will push you to sustain earnings year to year. (Mr. Kilts applied this advice to build his company’s value quickly. In February 2001, when he took over as chairman and CEO, the company’s market value was $34 billion. Just 4.5 years later, Proctor & Gamble bought the company for $57 billion.) What level of earnings growth is just above your market’s median?
Dodd and Favaro conclude that emphasizing one objective over its counterpart does not improve performance, except for start-ups, exits, and performance crises. They advise business owners not to prioritize between objectives within a set, but to prioritize between sets. Pick the appropriate tension-set for your company (Step Two); then build the force common to both objectives in that set (Step Three). Do this and you will be fine.
I welcome e-mail from you about how you applied these principles for managing your competing objectives.
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