For a company to grow by breaking compromises, it must have the creativity to translate customer dissatisfactions into new value propositions, the flexibility to engage in constant reorientation of its business system, and the nerve to challenge business-as-usual in its industry. There are three basic steps:
Get inside the customer experience. Start by asking your managers and employees to immerse themselves in the customer’s experience. It is critical to develop a visceral feel for the compromises consumers encounter when they do business with you.
A compromise often becomes visible when customers have to modify their behavior to use a company’s product or service. So, pay special attention to the compensatory behaviors customers engage in to get around the constraints that your product or service imposes on them. In the brokerage business, for instance, it was common knowledge that customers often called back a second or even a third time to confirm that their trade had gone through at the price requested. By paying careful attention to this behavior, Schwab realized that the ability to provide immediate confirmation when an order was taken would eliminate the extra calls, saving customers a lot of trouble and giving Schwab a significant advantage over its competitors.
Travel up the hierarchy of compromises. Once the organization is focused on the customer experience, learn to recognize three different types of compromises, each with increasing potential to create value.
Some of the most obvious can be found in your company’s existing products or services. It was Chrysler’s awareness of the compromises between station wagons (based on a car platform) and vans(based on a truck platform) that led to the minivan, a van based on a car platform. In the ten years after Chrysler introduced the minivan in 1984, minivan sales grew eight times as fast as industry sales overall.
Other, more powerful compromises can be found at the level of an entire product category. Witness how Nike has transformed the athletic footwear category by combining continuous innovation in shoe design with the proliferation of narrowly defined customer segments. Nike doesn’t just make basketball shoes. It makes “Air Jordans,”“Force,” and “Flight,” each designed for a different playing style, with different design requirements, and a different image.
The most powerful compromises are often the hardest to identify: broad social dissatisfactions that may have little to do with your product or industry but a lot to do with how your customers live their lives. For example, long-term social and economic trends are causing more and more people to manage their own investments. And yet, lack of time and growing economic complexity can make this an immensely frustrating task. Schwab’s ability to address that frustration is a big factor in its success.
Reconstruct your value chain. Defining new value propositions for the customer is necessary but not sufficient. You must also use the compromises you break to redefine the competitive dynamics of your industry, to ensure that the economic value liberated by compromise-breaking flows to you rather than your competitors. So, think of compromises as an opportunity to reshape the value chain of your industry to your advantage. When Schwab entered the mutual fund business, its first thought was to create its own family of funds. Careful analysis of the industry value chain, however, revealed an even bigger opportunity: to become an intermediary between its own customer base and a large number of subscale mutual-fund companies.Through OneSource, the firm serves the needs of the fund companies by providing them with economies of scale they could not achieve on their own. At the same time, Schwab interposes itself between the funds and the customer. Schwab’s ownership of the direct customer relationship now provides a platform for growth in other financial services, such as insurance.
To break compromises, executives must first break with the conventional wisdom of their industry—about customers, about industry practices, and about the economics of the business. When they do, faster growth and improved profitability are the result.