Breaking Compromises

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Breaking Compromises

1997 by George Stalk, David Pecaut, and Benjamin Burnett
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    • The idea of compromises can be a useful organizing principle to focus an entire company on growth

    • Compromises are inherent in any business. Even when a company breaks one compromise, it usually ends up creating another

    • When executives break with the conventional wisdom of their industry, faster growth and improved profitability are the result


    Many companies today are searching for growth. How and where should they look? One powerful way to grow is through innovations that break the fundamental “compromises” of a business. When a company successfully breaks a compromise, it releases enormous trapped value. Breakaway growth can be the result.

    Compromises are concessions demanded of consumers by most of the companies in an industry. They occur when the industry imposes its own operating constraints on customers. Usually, customers accept these compromises as just the way the business works—inevitable tradeoffs that have to be endured.

    But a compromise is different from a tradeoff. In choosing a hotel room, for instance, a customer can trade off luxury for economy by choosing between a Ritz-Carlton and a Best Western. Until recently, however, most hotels forced all customers to compromise by not permitting checkin before 4:00 p.m. No law of nature or economics decrees that hotel rooms can’t be ready before late afternoon.

    Uncompromising Opportunity

    The idea of compromises can be a useful organizing principle to focus an entire company on growth. It provides a systematic way to search for growth opportunities that are logical extensions of a company’s existing business system.

    Take the example of Circuit City’s recent foray into the used-car business through the creation of a network of used-car superstores under the brand name CarMax. Annual used-car sales in North America top $200 billion, making it the third-largest consumer spending category, behind food and clothing. What’s more, few experiences are more fraught with compromises. Shopping for a used car is extremely time-consuming. And the buyer is at a fundamental disadvantage, ignorant about the actual condition of the product and subject to high-pressure sales tactics.

    Circuit City concluded that many of the distinguishing capabilities of its consumer-electronics business could be used to break the compromises imposed on used-car buyers. Circuit City is known for the wide variety of its merchandise. CarMax takes the same approach. The typical used-car dealer has only 30 vehicles in stock, CarMax sites have up to 1,500. That makes it easy for customers to compare makes and styles. CarMax further enhances customer choice and lowers search costs by harnessing Circuit City’s considerable expertise in information systems. At CarMax, customers have access to easy-to-use computer kiosks that allow them to review the inventory of available cars at all the CarMax stores in the region.

    CarMax hasn’t hesitated to deviate from the Circuit City model when the strategic logic requires it. For instance, Circuit City pays percentage-ofsales commissions to its consumer electronics sales force, but CarMax does not. Because a key compromise in used cars is pressure selling, the unit has created a compensation system that encourages no-haggle pricing and no-hassle guarantees. The result: an integrated business system that offers a fundamentally different experience to used-car buyers, and a business model that has allowed CarMax to capture roughly 15 points of share in the markets where it is active.

    A Pathway to Growth

    Compromises are inherent in any business. Even when a company breaks one compromise, it usually ends up creating another. By focusing on compromises, a company can continuously uncover fresh opportunities and thus sustain growth over time.

    The financial services company Charles Schwab, for example, was founded on the breaking of a compromise. The company began as a discount brokerage in 1975, when the deregulation of U.S. security markets made it unnecessary for individual investors to pay high fees to full-service brokers.

    But Schwab didn’t stop there. Next, it broke the compromise set up by the discount brokerage houses themselves. Although these new firms offered low prices, most also provided unreliable service. By investing in computer technology that allowed almost immediate confirmation of orders over the telephone, Schwab was able to combine low prices with levels of responsiveness unusual for its industry. Subsequently, Schwab added convenience, flexibility, and ease of transferring funds to its value proposition through the provision of 24-hour-a-day, seven-day-a-week service, the Schwab One cash-management account, and automated phone and electronic trading.

    Recently, Schwab has used its compromise-breaking capabilities to enter the mutual fund business. Most people invest in several fund families to achieve diversification. But diversification often comes at the price of frustration. It means dealing with a confusing variety of statements, rules, and sales representatives. In 1992, Schwab introduced OneSource, a single point of purchase for more than 350 no-load mutual funds. In the more than 20 years since its founding, Schwab has evolved from a simple discount broker to a comprehensive self-help financial supermarket, and has generated an annual growth rate of 20-25 percent.

    Creativity, Flexibility, and Nerve

    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.

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