Capitalizing on Anomalies

Capitalizing on Anomalies

          
Article image

Capitalizing on Anomalies

Operations, Strategy
  • Add To Interests
  • SAVE CONTENT
  • PRINT
  • PDF

  • Related Articles
    In This Article
    • Idiosyncratic customer preferences or employee behavior can lead to aberrations in business results. How do you deal with these anomalies?

    • Anomalies can reveal what your customers really want—and what your organization is capable of delivering in response.

     

    Sometimes the best opportunities lie hidden in something that, at first glance, makes no sense. Idiosyncratic customer preferences or employee behavior can lead to aberrations in business results. How do you deal with these anomalies?

    One common response is to ignore them. Most organizations try to contain or suppress anomalies, for fear they will draw attention to departures from standard operating practice. When senior managers learn of anomalies, they generally dismiss them as random, one-time events.

    That’s too bad. Anomalies can reveal what your customers really want—and what your organization is capable of delivering in response. Paying attention to them may point you to major opportunities to grow your business, by doing on a broad scale what some part of your company is already doing on a small scale.

    Wise executives capitalize on anomalies. They dig into them and look for ways to exploit them, asking: What’s really going on? How can we learn from this? Is there an insight buried here that can move the business to a whole new level?

    Inadvertent Next-Day Delivery

    At one broad-line manufacturer, the businessaltering anomaly was in the behavior of its distributors in a single geographic market. In most manufacturing businesses, distributors tend to carry the products of only one or two suppliers, and suppliers tend to do business with only a few key distributors in any given market. But in Chicago, a large market with many distributors, the company found that it was selling its specialty products to nearly every distributor in town. This didn’t make sense. Why were all these Chicago distributors willing to buy from the same manufacturer?

    The initial answers—“Chicago is just different” and “We’ve got a great sales rep there”—weren’t much help. But patient digging revealed the real explanation: the company’s factory was located only 200 miles from Chicago, and Chicago was on the way to almost all of the company’s other markets. The frequent shipping runs through the area had inadvertently created a system of nextday delivery in and around Chicago. Distributors could stock a broader range at dramatically higher inventory turns, simultaneously enhancing their economics and allowing them to be more responsive to their customers.

    Once they saw it, company executives began thinking about their business differently. They realized they could replicate the pattern in other markets. They assigned pairs of drivers to each truck and increased the “overnight” service range to 600 miles. They added order-entry and logistics systems that allowed them to make overnight delivery of high-tonnage orders. They expanded product variety to exploit new opportunities for even wider market access. Over time, they tripled or quadrupled market share in a half dozen Midwest cities, and improved the product mix. Profits increased eight-fold. Recently, the company acquired a new factory in another part of the country and is rolling out the same strategy in this new region.

    Traffic-Jam Sales and Service

    At a maker of high-tech health care diagnostic machines, the key anomaly was in the unusual performance of a local sales-and-service unit. A curious manager noticed that in Manhattan, the company had an extremely high capture rate for lucrative service contracts to maintain and repair the complex technology. What’s more, customers there were buying all their new equipment from the company, even in product lines where the company’s market share was normally quite low.

    Closer inspection revealed that the Manhattan sales-and-service unit was the only one in the company assigning full-time, on-site service engineers to customer locations. Constant contact bred close relationships with both the buyers and the users of the equipment, and an in-depth understanding of their needs. Master technicians had become the company’s most productive salespeople.

    Was the decision to locate the service engineers on the customers’ premises a brilliant strategic decision? Hardly. The local service manager was simply trying to avoid having highly-paid service technicians waste time in Manhattan traffic jams going from site to site. But understanding the anomaly did lead to a winning strategy. By assigning on-site technicians to customers in other regions, the company added 8 points of market share and boosted margins by 25 percent. It also gained a first-mover advantage over its rivals.

    From Serendipity to System

    The innovations at these two companies were serendipitous. What does it take to capitalize on anomalies systematically?

    For starters, you need to have metrics and information systems that are sufficiently refined to identify anomalies in the first place. Knowing the average margins and market share isn’t enough; look at the entire range of outcomes—across customers, geographies, products, and the like. This allows you to surface out-of-the-ordinary results for closer inspection.

    The next step is to separate wheat from chaff: those anomalies that signal a potential business opportunity from those that are merely one-time events. The key is to examine the pattern of unusual performance over time. The customer who consistently buys high volumes or the market that outperforms the average year after year are, by definition, not random. Is there an underlying cause that can be identified and then replicated elsewhere?

    Finally, you need to understand the precise mechanisms that animate the anomalies you identify. Why is the unusual pattern of performance happening? What specific features of the product, or the local environment, or the customer experience are bringing it about? Don’t accept the usual firstorder explanations. It’s not enough to know that a particular customer has been loyal for years; find out precisely why.

    It’s up to senior management to create the forum for asking why and to persist until the question is answered with genuine insight. Business unit personnel may be closest to the details of the anomaly in question, but they are usually too caught up in the day-to-day demands of the business to recognize the strategic significance of unusual patterns and practices. It often takes someone one step removed—regularly scanning the business for unexpected results—to notice and act on anomalies. It also takes an appreciation of differences, a lively sense of curiosity, a willingness to “play” with the taken-for-granted rules of the business.

    Timing is important. The worst time to look for anomalies is during a budget review, when everyone is worried about control numbers. A much better time is in a strategic review, when everyone should be prepared to think creatively about the future. Companies that consistently exploit anomalies plan for their future by reflecting on their past. A retrospective look at their strategy and business results allows them to take advantage of the serendipitous in a highly systematic way. As one executive put it, “we innovate from our own accidents.”

    Taking advantage of anomalies is an opportunity to inject into your company some of the experimentation and vitality characteristic of start-ups. Every day, entrepreneurs are working to reinvent your business and carve out a piece of it for themselves. By capitalizing on anomalies, you can harness the same kind of creative energy and put growth back on your company’s agenda.

    To Contact the Author
  • Add To Interests
  • SAVE CONTENT
  • PRINT
  • PDF