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.
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.
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.
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.”
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.
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.
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.
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.
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.
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.
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.
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
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?
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.
Art of Retail Management -- Habit: Fixing the Fix You're In
May 18, 2007