This book is about the men who try to earn a profit from the tightrope act…Airlines are managed as information systems and operated as networks. They embody, and can help us understand, some of the vexing paradoxes of modern economic life—why the value pricing revolution has given consumers unparalleled economic power, for instance, while at the same time causing the living standards of so many to decline. The airlines also provide vivid case studies in corporate strategy. The terrific sums of capital at stake and the numbing repetitiveness of their operations make airlines uniquely sensitive to the commands of management. Even a question of substituting chicken Parmesan for chicken divan becomes a vital corporate matter—to say nothing of deciding to which continents an airline should fly, what fares it should charge, how many jets it should buy, or whether it should assent to the demands of a union or instead allow employees to go on strike. The thinness of the industry’s margin of error is evident in how many names have vanished from the roster
The men who run the airlines of America are an extreme type; calling them men of ego would be like calling Mount McKinley a rise in the landscape. Airlines demand a single strategic vision, lest the delicate choreography of airplanes, people, timetables, and finance break down. The airlines both attract and promote executives obsessed with control, who flourish at the center of all decision making.
A timber magnate in Seattle named William E. Boeing, bidding low because he built his own airplanes, won the line from Chicago to San Francisco, giving birth to what would become United Airlines.
Trippe had discovered what might be called the First Rule of Airline Economics: If a plane is going to take off anyway—once the fuel is purchased and the pilot paid and the interest rendered on the money borrowed to buy the plane in the first place—any paying passenger or payload recruited to the flight is almost pure profit. The fare paid by the last passenger taken on board represents a fabulously lucrative rate of return.
Increasing passenger traffic, Brown reasoned, was the one sure way to wean the airlines from postal subsidies. But public confidence could be inspired only by big, financially secure carriers committed to safety, maintenance, and training, not by the fly-by-night operators abounding at the time. Brown changed the rules so that the airlines received payments based not on the weight they carried, but on the distance they flew and the volume of space they maintained in reserve for the mail. This system guaranteed the airlines a minimum payment every time a mail plane left the ground, and the bigger the plane, the greater the payment. Though an outright gift to the airlines, Brown’s scheme gave them the incentive to order the sturdier and more costly planes then in development—planes, he hoped, that would help convince a wary public that it was at last safe to fly. Brown had codified the First Rule of Airline Economics into government policy: Once the flight was paid for, any additional payload was pure gravy.
Some of them went to management with an extraordinary proposal: to maintain the existing four-airplane schedule with only three airplanes. The company was incredulous. The only way to accomplish that would be to get the planes in the air after they’d been on the ground only 10 minutes—an unheard-of feat. Fine, some of the employees said. We’ll turn them around in 10 minutes. Pilots and management supervisors were soon helping with baggage. Tickets were collected on board rather than at the gate…Each airplane was restocked with beer, booze, and soft drinks through the rear door while passengers were still deplaning through the front. Flight attendants worked their way to the front of the cabin as passengers exited the planes, picking up newspapers and crossing seat belts row by row, rather than waiting for ground handlers to come aboard. Once the last passenger had deplaned, the remaining flight attendants began performing the same tasks from front to back. “When they meet, they have time to brush their hair,” a trade publication, Aviation Week & Space Technology, would incredulously report. And as the next cargo of passengers came aboard, they did so with no seat assignments, which meant that people simply stepped into one seat and then the next and then the next, in a nice, orderly, rapid sequence. Everyone’s job had been saved. Braniff and Texas International watched in horror as Southwest gave birth to the airline industry’s first 10-minute turnaround.
Southwest had discovered another lesson in airline marketing: giving the expense-account customer something for free that he could take home instead of to the office—in short, a kickback—won his undying loyalty.
Surveys showed that 25 percent of the people flying on “peanuts fares” would have otherwise made their trip in a car; an additional 30 percent otherwise would have stayed home. Some of these new, first-time fliers began to think about doing it a second time, and a third.
On the rare occasions that United got the better of American, Crandall blew his stack and demanded immediate countermeasures. At one point United obtained an exclusive software license from a Florida company for a series of bookkeeping and other programs that could be made available to travel agents over the Apollo network. Crandall ordered his people to jump on the next flight to Florida, where they arranged to buy the very company that had sold the software license to United. American gained the benefit not only of owning the technology but of employing all the people who had developed it. Sabre was not only a way of making fees, of course, but also a distribution system for American’s own flights. Although agents could book flights on nearly any airline through Sabre, Crandall began enticing agents to skew their bookings toward American with an addictive new financial arrangement. The greater the dollar value of an agency’s business with American, the greater the percentage the agency received on the entire sum. The standard 5 percent commission might be increased to 6 percent, say, on ticket sales over $1 million, or 7 percent on sales over $3 million. (American could easily pay the higher rate, since each additional passenger put so much money on the bottom line.) The more American flights an agency booked through Sabre, the greater its incentive to buy still more flights on American.
“We are a highly financially successful airline, and the focus of the entire airline industry, the public, and the legislators in Washington,” the presentation read. “Maximization of the financial (e.g., cost cutting, marketing, peanuts fares, debt structure, etc.) was historically correct and absolutely essential for this company’s survival at one time in our history. “But when low fares become universal,” the report went on, “we will be left in large part with the ‘people’ equation as the chief component of competitive leverage.” Success and failure in the airline business, the report said, would be decided on customer service.
Lorenzo also borrowed from the underdog strategy that Herb Kelleher of Southwest Airlines had used against him, showing up at hearings and local community meetings with only one or two executives in tow, in contrast to the platoon that Pan Am always dispatched.
The permutations increase arithmetically according to the number of aircraft and geometrically according to the number of aircraft types in any given fleet—another of the reverse economies of scale that plague airlines as they grow.
They would walk into the meeting with knots in their stomachs, for it was an unforgivable sin at American Airlines to appear in a meeting before Bob Crandall without having every fact at one’s command. He would cut you to ribbons.
Braniff’s powerful hub vividly demonstrated another inviolate rule of the airline business: Whoever has the most flights from a city gets a disproportionate share of the passengers. Frequency enhanced convenience—the convenience of flying the day of your meeting, not the night before; the convenience of arriving just an hour before your business was scheduled to begin.
Meanwhile the endless computer studies at American had turned up another fascinating fact. Although American carried 25 million passengers a year, something like 40 percent of its business came from about 5 percent of its customers. There were that many repeat customers—“frequent fliers,” one might call them. Any incremental customer was welcome, of course, but every incremental frequent flier was, on average, nearly 10 times more valuable.
That was it. American could have its customers accumulate mileage instead of Green Stamps, earning free travel instead of household appliances. The concept was not unheard-of among the airlines. Southwest Airlines already had a program in which secretaries got free travel after booking so many trips for their bosses.
The element of surprise was critical. Other major airlines would have no choice but to match the program, but it would take them months to catch up, months in which American would have the entire field to itself. By having all the necessary Sabre programming written and debugged in advance, American would allow passengers to start accumulating mileage on the very day that it announced the program.
Other airlines, ordering whatever happened to be the new or sexy or cool plane of the moment, invariably wound up with many species of aircraft in their fleets. Southwest, by contrast, flew only 737s, requiring it to stockpile parts and train pilots and mechanics for only one kind of plane. The efficiencies were huge. Now, instead of rushing out to buy something altogether new, Southwest persuaded Boeing simply to update the old reliable 737.
Thus, as air cascades along the bottom of a wing, it is also being sucked, as if from a vacuum cleaner, toward the top of the wing. The faster the wing travels laterally, the greater the pressure differential above and below. The greater the differential, the greater the lift generated. Safety lay in speed.
In its studies of the failed Continental strike ALPA had also discovered the critical role that wives played in the decisions of their husbands in crossing picket lines.
In Dallas Bob Crandall was jealous and outraged to learn that United was buying the Pacific division of Pan Am—and that he had never been given the opportunity to bid on it. Crandall could not imagine why he had been entirely cut out. In fact Acker and Gitner had considered shopping the routes to Crandall, whose interest in establishing foreign routes was well known. But Pan Am had previously conducted a major airplane swap with American, and they had found Crandall prickly and impossible to satisfy. The Pacific sale was an emergency transaction. A strike had been raging and cash dwindling. There was no time for dealing with a difficult personality. No one ever told Crandall that he was denied the chance to make the airline deal of the decade because he was just too tough.
The whole airline industry had become a living expression of the S-curve of yore: he who has the most planes gets more than his proportion of the passengers.
Just as Burr and his associates had made a virtue of the simplicity of peanuts fares back at Texas International, so too did People Express promote the simplicity of its fare structure; one series of ads showed a reservationist for the fictitious “BS Airlines” double-talking through a series of ludicrously complex restrictions. Even where the major airlines bravely matched People Express dollar for dollar, Burr still benefited because the low fares brought so many passengers into the market that all airlines benefited.
To make a reservation someone—a passenger or a travel agent—had to phone People Express directly, which proved a maddening experience; the relentless busy signal at People Express accounted for the first acquaintance of many people with the redial button on their telephones. By 1984 some 6,000 potential passengers a day failed to connect by phone. Burr also suffered uniquely from the age-old problem of overbooking. People Express permitted customers to buy their tickets after they had boarded the airplane, giving no passenger the slightest incentive to honor a reservation, much less to cancel one after his or her plans had changed. No-shows were so numerous that People Express began overselling some flights by 100 percent. Often, of course, many of the expected no-shows actually materialized, leaving dozens of unhappy people with confirmed reservations stuck in the pandemonium of the North Terminal.
Any incremental passenger is worthwhile, at virtually any price.
In the unwritten rules of the post-deregulation era, three major airlines operating within a single hub city was at least one too many. As American had displayed in Dallas, operating a hub had become a contest to control the maximum number of passengers between the maximum number of city pairs. This strategy demanded a huge number of airplanes flying hundreds of hub landings and departures every day, like a hive of worker bees racing to and from their queen. It was only marginally economical for two big carriers to conduct service on this scale at a hub; where three airlines attempted to do so, planes flew empty, which meant that fares plunged, which meant that no one made any money on anything.
Don Burr did not realize that he was whistling “Dixie.” The majors were not, as a matter of fact, using their transcontinental routes to subsidize their short-haul routes—at least not enough to account for their 70 percent discounts. The majors were offering low fares against People Express because they had computers that enabled them to offer rock-bottom prices to discretionary passengers and still keep as many seats as necessary in store for higher-paying passengers. That was the cross-subsidy that was killing People Express.
As he had planned, Burr grafted the systems and culture of People Express onto Frontier; the disaster was monumental. Frontier had always been considered a classy airline, and the years of warfare with United and Continental had only brought out the best in service at all three. Now longtime Frontier passengers were being charged 50¢ for a cup of coffee. To stuff more seats into Frontier’s airplanes, Burr took out the galleys and began serving cold meals—three bucks for crackers, cheese, maybe some sausage. “Kibbles’N Bits,” people called it.
The computer technology that wiped out People Express in the marketplace did for flying what the assembly line did for the automobile. It reduced it to the most common denominator.
Inside the airline industry, however, everyone knew Southwest and only too well. It had never lost money, from the time it was fully established in business. And it had flourished while defying almost every success maxim of the post-deregulation world: it had no computer reservations system, offered no frequent-flier program, did not conduct yield management, and had never organized its flight schedules around anything remotely approaching a hub. How did Southwest do it? Consultants and academics were forever crawling over the company, looking for an answer as if they were searching for the recipe for Coke. Through all the studies no one ever had a better explanation than Robert Baker, who as Bob Crandall’s principal operating aide at American had come to know Southwest well. “That place,” Baker would say, “runs on Herb Kelleher’s bullshit.”
Within a year of offering service Southwest often doubled the ridership of whatever circuitous or direct service existed previously and doubled it again within the second year. It was unique among the airlines not only because it flew point to point instead of through hubs, but also because it built its markets almost entirely through a direct appeal to the public, bypassing travel agents. Southwest was happy to let other airlines fight for the loyalties of travel agents; doing so had pushed the commissions paid to travel agents to 10 percent of the ticket price, up from 5 percent in the regulated era. Southwest in fact did not particularly need travel agents. There were rarely any complicated itineraries involved in flying Southwest; the trip was usually just there and back, often in the same day. Southwest’s fares were excruciatingly simple, generally just two prices (peak and off-peak) on any route. Travel agents, for their part, were only too happy to let passengers handle their own reservations on Southwest; at such low fares the commissions were hardly worth it, especially since for the most part travel agents had to book reservations on Southwest by phone. Southwest refused to pay transaction fees to the major computer reservation systems.
Kelleher perpetuated the company’s underdog spirit. He had never fully recovered from the legal battle to get Southwest aloft and the trauma of its harrowing shoestring days, and neither had the earliest generation of employees. Maintaining the culture of martyrdom became so essential a strategy that it overpowered other corporate objectives; Southwest added cities and airplanes much more slowly than it could afford to, for instance, in large part to avoid an influx of new employees, which might dilute the purity of the “Southwest spirit.”
Kelleher also took the risky step of actively fostering “fun” in the workplace—risky because employees can easily spot a fake when such efforts are structured to manipulate or offered as a substitute for pay or perquisites. Kelleher’s intentions were indisputably commercial: happy employees are not only more productive but less apt to brood over setbacks and frustrations. More important, an ambiance of cheer—at the ticket counter, on the telephone, in the passenger cabin—was a critical component of Southwest’s no-frills marketing formula.
The passenger was deemed paramount; every employee’s paycheck bore the words, “From our customers.”
At least two factors at Southwest rescued this culture from cynicism. For one, Southwest had always encouraged spontaneous acts of frolic, such as a flight attendant’s conducting the preflight safety demonstrations to the tune of the William Tell Overture or the theme from The Beverly Hillbillies, or trying to see how many passengers would fit in a lavatory, or conducting a contest to see which passenger had the biggest hole in his sock. Instead of homogenizing the product (as no one did better than American, for instance), Southwest rewarded departures from the standard. Southwest also succeeded in nurturing fun because Kelleher cast himself as the chief jester—and made himself the butt of the most jokes. No personal appearance was too demeaning, no crack too crass.
As for Kelleher’s own office, the architect had received specific instructions: no windows. Once word had spread that he had a windowless office, Kelleher explained, how could anyone dare jockey for an office with a better view? To further control new-office politics, his executive assistant, Colleen Barrett, now a corporate officer, banned department heads from the committee planning the move; underlings, she and Herb reasoned, would be less absorbed in issues of office size and more committed to the merits of any space issue.
Kelleher was a hero-worshiper and a reader of history and literature who could reel off couplets from Wordsworth, aphorisms from Clausewitz, and exchanges from Nixon’s 1950 debates with Helen Gahagan Douglas.
This is where Southwest came in. While the major airlines were frantically working to become all things to everyone, Southwest recognized that a huge number of people in any city would rarely want to fly anywhere except to a few other cities.
That Southwest operated largely in a market all its own was most evident in its headquarters town of Dallas. Southwest shared its operating center with the fastest growing and most ruthlessly powerful airline in the world, American Airlines. Yet even as both airlines grew, even as the airline industry became more competitive year by year, American and Southwest served increasingly divergent markets from their respective airports and actually became less competitive as time passed.
One evening Kelleher was talking to a business executive at a cocktail reception in Dallas. “I see that American now has fares as low as yours,” the man said. “Yes,” Kelleher admitted. But American, he patiently explained, required passengers to buy a ticket 30 days in advance. By contrast, Kelleher said cheerfully, anyone could walk right up to the airport gate and fly at those prices on Southwest.
But Southwest quickly realized that by exposing itself to even the rudiments of yield management, it could take its low fares so much lower that they practically disappeared—while the flights themselves remained profitable. Suddenly a passenger could fly anywhere on Southwest Airlines for $19. After American had beaten People Express at its game, Southwest was beating American at its.
Kelleher did harbor a flaw, however, one that was so obvious no one could appreciate it. He had made Southwest Airlines a one-man show.
Lorenzo had not foreseen the worst problem of all: scheduling the newly swollen and far-flung workforce. As with so much else in airlines, crew scheduling creates a reverse economy of scale: the bigger the operation, the more difficult, costly, and inefficient it becomes. Pilots and flight attendants, calling in for new assignments as flight cancellations worsened, encountered busy signals, meaning they could not be reassigned, causing still more flights to be canceled. There’s no such thing as a half-broken airline.
In the brief time he had served as the president of Continental Airlines, Tom Plaskett learned that aircraft suppliers made a point of keeping a little something in reserve in any negotiation with Lorenzo, even past the point of the handshakes, because Lorenzo would try to re-trade the deal. They called it the “Frank factor.” Phil Bakes would call this phenomenon the “last nickel” impulse.
Bob Crandall rapidly filled the void left by Eastern in Miami. Before long American would control 85 percent of the airline seats going in and out of the vital gateway. Having so many seats at a single airport, as he once explained to a meeting of his pilots, gave Crandall control not only over the local aviation market but over the community’s travel agents as well.
The self-destruction of Continental Airlines vividly revealed a principle as old as passenger flight itself: people will tolerate many sacrifices to fly, but they will not tolerate surprise. Predictability—the fulfillment of expectations—is the most important factor in whether an airplane flight is a pleasantly efficient experience or one of modern life’s worst travails. This principle is doubly important on international flights.
Like bees, airlines pollinate the world’s financial system with capital. They create, mobilize, and transport wealth in proportions vastly exceeding the fares paid by the passengers.
For a boy who grew up poor, Wolf acclimated himself easily to the badges of fortune.
Crandall, for all his ruthlessness as a taskmaster, was perhaps the best boss in the airline industry for female executives; a number had attained top positions in Crandall’s organization. If Crandall harbored any of the sexist bias so prevalent in the airline industry, it was snuffed out by his obsession with performance.
The company was now losing something like $2 million a day. Pan Am’s personnel analysts observed a sudden, sharp increase in medical claims, apparently as employees hurried up elective medical attention on the expectation that their benefits might soon vanish.
But Delta delivered for its employees. Delta people got jobs for life; the company had not laid off a soul in 34 years. There had been no BOHICA, no concessions, no b-scales. Delta paid its people exceptionally well, not only by the standards of the low-wage southern United States but by airline industry standards as well. On the initiative of the flight attendants, Delta’s employees had once organized the purchase of a Boeing 767—a $30 million airplane—from their own paychecks. It was only such a corporate environment that could produce an airline chief executive officer from the ranks of the personnel department. Ron Allen—like all his predecessors in the chairman’s suite, a born-and-bred Delta product
Freddie Laker had been out of business nearly two years when an American lawyer living in London came to Branson in 1984 with a plan to resurrect Laker’s operating authority between Gatwick and Newark. Branson quickly bought the idea, sticking the Virgin logo on it. The two days he had spent trying to get through on the telephone to People Express was the entirety of his market research. The failure of anyone to answer the phone told him that either there remained either unrequited demand for cheap flights over the Atlantic or the service being provided was incompetent. Either way there was an opening
What I got out of it
An incredibly captivating and fun deep dive into the foundations and evolution of the airline industry with a lot of narrative lessons about business model, strategy, incentives, psychology, and more
Joe Coulombe shares how Trader Joe’s came to be and some of his core operating principles.
His first rule for new ideas was to always think outside the box, but always consider our customers and employees.
I began the transition of Pronto into Trader Joe’s. I resigned at the end of 1988. During those twenty-six years, our sales grew at a compound rate of 19 percent per year. During the same twenty-six years, our net worth grew at a compound rate of 26 percent per year. Furthermore, during the last thirteen years of that period, we had no fixed, interest-bearing debt, only current liabilities. We went from leveraged to the gills in the early days to zero leverage by 1975. Furthermore, we never lost money in a year, and each year was more profitable than the preceding year despite wild swings in income tax rates.
In June 1982, my wife, Alice, and I went to Lima to visit the canning plant. We witnessed something very interesting: the United States had a quota for imported tuna. Once Peru’s quota had been filled, a biological miracle occurred right there on the canning line. What had been tuna was now pilchard, a member of the herring family, on which there was no quota. The like hasn’t been seen since the Sea of Galilee! To this day, Trader Joe’s is virtually the only retailer of pilchard.
technology for grinding almonds is completely different than the technology for grinding peanuts. Finally, Doug, whom you will meet often in these pages, found a religious colony in Oregon who had mastered the trick and taught it to Doug.
If all the facts could be known, idiots could make the decisions. —Tex Thornton, cofounder of Litton Industries, quoted in the Los Angeles Times in the mid-1960s. This is my favorite of all managerial quotes.
In 1962, Barbara Tuchman published The Guns of August, an account of the first ninety days of World War I. It’s the best book on management—and, especially, mismanagement—I’ve ever read. The most basic conclusion I drew from her book was that, if you adopt a reasonable strategy, as opposed to waiting for an optimum strategy, and stick with it, you’ll probably succeed. Tenacity is as important as brilliance.
. . non-convex problems . . . are puzzles in which there may be several good but not ideal answers which classical search techniques may wrongly identify as the best one. I concluded that I didn’t have to find an optimum solution to Pronto’s difficulties, just a reasonable one. Trying to find an optimum solution in business is a waste of time: the factors in the equation are changing all the time.
This is the most important single business decision I ever made: to pay people well. Time and again I am asked why no one has successfully replicated Trader Joe’s. The answer is that no one has been willing to pay the wages and benefits, and thereby attract—and keep—the quality of people who work at Trader Joe’s. My standard was simple: the average full-time employee in the stores would make the median family income for California. Back in those days it was about $7,000; as I write this, it is around $40,000. What I didn’t count on back there in the 1960s was that so many spouses would go to work in the national economy. When I started, average family income was about the same as average employee income. The great social change of the 1970s and 1980s moved millions of women into the workplace. Average family income soared ahead. But we stuck with our standard, and it paid off.
We really didn’t pay more per hour than union scale, but we gave people hours. Because union scale is so high, the supermarkets are very stingy with hours and will do anything to avoid paying overtime. I simply built overtime into the system: everyone was to work a five day, forty-eight-hour week. Actually, because of fluctuations in the business, employees often alternate between four-day and six-day weeks (38.5 hours to 57.5 hours). This generates a lot of three-day weekends, which is quite popular with the troops.
Equally important was our practice of giving every full-time employee an interview every six months. At Stanford I’d been taught that employees never organize because of money: they organize because of un-listened-to grievances. We set up a program under which each employee (including some part-timers) was interviewed, not by the immediate superior, the store manager, but by the manager’s superior. The principal purpose of this program was to vent grievances and address them where possible. And I think this program was as important as pay in keeping employees with us.
In a lecture at the University of Southern California Business School, I talked about this. A young woman raised her hand: “But how could you afford to pay so much more than your competition?” The answer, of course, is that good people pay by their extra productivity. You can’t afford to have cheap employees.
Early in my career I learned there are two kinds of decisions: the ones that are easily reversible and the ones that aren’t. Fifteen-year leases are the least-reversible decisions you can make. That’s why, throughout my career, I kept absolute control of real estate decisions
To this day, the promotion of Extra Large AA eggs is one of the foundations of Trader Joe’s merchandising, not just because of the program per se, but because it set me to wondering whether there weren’t other discontinuities out there in the supplies of merchandise. Eight years later, we built Trader Joe’s on the principle of discontinuity.
As we evolved Trader Joe’s, its greatest departure from the norm wasn’t its size or its decor. It was our commitment to product knowledge, something which was totally foreign to the mass-merchant culture, and our turning our backs to branded merchandise.
Still trying to maximize the use of a small store, I looked for other categories that met the Four Tests: high value per cubic inch, high rate of consumption; easily handled; and something in which we could be outstanding in terms of price or assortment.
I took a cue from General Patton, who thought that the greatest danger was not that the enemy would learn his plans, but that his own troops would not.
I admire Nordstrom’s fundamental instruction to its employees: use your best judgment.
We became the best place in the world to buy a good bottle of wine for less than $2.00. That’s a position we held for the rest of my days at Trader Joe’s. It absolutely addressed our prime market, the overeducated and underpaid people of California.
Leroy found a hippie outfit in Venice—I think it was called Mom’s Trucking—which would package the bran. But bran is a low-value product. They couldn’t afford to deliver it. Since they also packaged nuts and dried fruits, however, we somewhat reluctantly added them to the order. And that’s how Trader Joe’s became the largest retailer of nuts and dried fruits in California! Brilliant foresight! Astute market analysis!
Growth for the sake of growth still troubles me. It seems unnatural, even perverted.
One of the fundamental tenets of Trader Joe’s is that its retail prices don’t change unless its costs change. There are no weekend ad prices, no in-and-out pricing.
One should never use a mandatory sentence in addressing a customer; should never give orders. The subliminal message of a Trader Joe’s commercial is, “We’re gonna be around for a long time. If you miss out on this bargain, there’ll be another. If you have the time and inclination .
My point is that a businessperson who complains about problems doesn’t understand where his bread is coming from. So by hairballs I don’t mean those fundamental issues such as demand, supply, competition, labor, capital, etc., which create the matrix of a business. By hairballs, I mean those wholly unnecessary thorns that come unexpectedly. Their greatest danger is that they consume management stamina that is needed to deal with the Matrix Issues.
We fundamentally changed the point of view of the business from customer-oriented to buyer-oriented. I put our buyers in charge of the company.
Each SKU would stand on its own two feet as a profit center. We would earn a gross profit on each SKU that was justified by the cost of handling that item. There would be no “loss leaders.”
Above all we would not carry any item unless we could be outstanding in terms of price (and make a profit at that price) or uniqueness.
Yet it cuts a wide swath in food retailing thanks to Intensive Buying, which is what the 1977 Five Year Plan boiled down to, which I formally named by the end of that plan, and which stressed mobility, irregularity, and adaptability.
Honor Thy Vendors – Many of our best product ideas and special buying opportunities came from our vendors.
Vendors should get prompt decisions. Some of our greatest coups were generated by our commitment to make an offer within twenty-four hours of a presentation.
Vendors should be regarded as extensions of the retailer, a Marks & Spencer concept. Their employees should be regarded almost as employees of the retailer. Concern for their welfare should be shown, because employee turnover at vendors sometimes can be more costly than turnover of your own employees.
adopted a rule: Screw me once, shame on you. Screw me twice, shame on me. The vendor who screwed us twice was through, forever. During all my years in the company, I can recall only a couple of instances of permanent banishment. One thing that never failed to astonish me was how well samples from vendors actually matched the delivered products. Most people, even vendors, act well if you treat them decently.
During the next twelve years under Mac the Knife, we not only radically changed the composition of what we sold; we totally centralized the distribution into our own system, ending all direct store deliveries by vendors!
People often ask me, how many stores did we have at such-and-such a time? It’s the wrong question to ask. What’s important is dollar sales. For example, from 1980 to 1988, we increased the number of stores by 50 percent, but sales were up 340 percent.
But my preference is to have a few stores, as far apart as possible, and to make them as high volume as possible. With Mac the Knife we could draw people from twenty-five to fifty miles away. When we opened Ventura in 1983, 30 percent of our business came from Santa Barbara. Sales per store, sales per square foot: those are the measures I look at. Trader Joe’s sales were $1,000 per square foot of total area. The supermarket average is $570, but they use “sales area” not total area. And yes, there is a difference.
I want to brag about something here: in thirty years we never had a layoff of full-time employees. Seasonal swings in business were handled with overtime pay to full-time employees, and by adjusting part-time hours. The stability of full-time employment at Trader Joe’s was due in part to caution in opening new stores, and insisting on high-volume stores.
I believe in ruthlessly dumping the dogs at whatever cost. Why? Because their real cost is in management energy. You always spend more time trying to make the dogs acceptable than in raising the okay stores into winners. And it’s in the dogs that you always have the most personnel problems.
I believe that the sine qua non for successful retailing is demographic coherence: all your locations should have the same demographics whether you are selling clothing or wine. We looked for our demographics: there are lots of overeducated and underpaid people in Southern California.
I liked semi-decayed neighborhoods, where the census tract income statistics looked terrible, but the mortgages were all paid-down, and the kids had left home. Housing and rental prices tend to be lower, and more suitable for those underpaid academics. Related to this, I was more interested in the number of households in a given area than the number of people in a ZIP code. Trader Joe’s is not a store for kids or big families. One or two adults was just fine.
Given the number of households, I would judge the degree of suitability based on my experience since 1954 in looking at California real estate, and then based on driving the area thoroughly. I would never trust a broker’s judgment. If I saw lots of campers and speedboats in the driveways, I’d ax the location. People who consume high levels of fossil fuels don’t fit the Trader Joe’s profile.
The answer is to design a store that has no competition. That’s why Mac the Knife should not carry any SKU in which it is not outstanding.
The bonus was based on Trader Joe’s overall profit, allocated among the stores based on each store’s contribution. Sure, we massaged the numbers to avoid perceived unfairness, but that was basically the system. In 1988, several Captains made bonuses of more than 70 percent of their base pay. And our 15.4 percent retirement accrual applied to bonuses as well as base pay! I don’t believe in bologna-slice bonuses. Unless a bonus system promises, and delivers, big rewards, it should be abandoned.
We instituted full health and dental insurance back in the 1960s when it was cheap. When I left, we were paying about $6,000 per employee per year! Why? If the employees are stressed by medical bills, they may steal. That’s one good reason for Trader Joe’s generous health and dental plans. On the other hand, we were cheap, cheap, cheap on life insurance. Nobody steals because of an inadequate life insurance program.
Each full-timer was supposed to be able to perform every job in the store, including checking, balancing the books, ordering each department, stocking, opening, closing, going to the bank, etc. Everybody worked the check stands in the course of a day, including the Captain.
The people in the stores were long-tenured, partly because most of our full-timers had risen from the ranks of the part-timers; and partly because of the slow growth of the number of stores, so there weren’t scads of promotion opportunities.
The top thirteen people were in the Central Management Bonus Pool. They voted each year how it would be divided among themselves and they usually voted to split the pool evenly, so Leroy got the same bonus as Doug Rauch or our Controller, Mary Genest. Like the Captains’ bonus pool, the bonus pool was determined by profit before taxes, and after the Captain’s bonus had been paid. It was rich, typically 40 percent of a Senior Project Director’s salary. As I recall in 1988, the typical salary and bonus came to $120,000.
Drucker wrote a seminal piece in the July 25, 1989, Wall Street Journal called “Sell the Mail Room.” Every executive should take it to heart.
We tried to stay out of all functions that were not central to our primary job in society: namely, buying and selling merchandise.
From my view, the Demand Side of Retailers can be analyzed in terms of five variables: The assortment of merchandise offered for sale. Pricing: stability (weekend ads?), and relative to competition. Convenience: geographical, in-store, and time. Credit: the accepted methods of payment. Showmanship: the sum of all activities that result in making contact with the customer, from advertising to store architecture to employee cleanliness. Here are factors on the Supply Side: Merchandise Vendors Employees The way you do things: “habits” and “culture” Systems Non-merchandise vendors Landlords Governments Bankers and investment bankers Stockholders Crime As in double entry accounting, the change in any factor must be matched by a corresponding change in another factor.
We never had “closeout” sales. What a terrible practice! You train your customers to wait for the “sale.” Any product that failed to sell was given to charity. We were developing new products all the time; sometimes they didn’t pan out. So we gave them away. I do not believe in “market testing” new products.
Lighting, I think, is one of the key elements in successful retailing.
For example, by the time I left Trader Joe’s, we were selling 45 percent of all the Jarlsberg cheese sold in California. Our price was $3.49. The going price in the supermarkets was $6.00. The “cost” of the supermarkets into their stores, however, was about $3.49. Why? Because the supermarkets insisted on advertising allowances, which were credited to the ad budget; cash discounts, which were credited to General Administration; promotional allowances, which were credited to revenue, etc. The apparent cost was inflated by all these accounting decisions. The fact is that most supermarkets don’t know what their true cost is for Jarlsberg because their buyers want to look good. They are incentivized by the amount of revenue and ad allowances they generate.
Trader Joe’s buying objective was to get just one, dead-net price, delivered to our distribution centers. This was quite similar to the policy that Sam Walton was developing at about the same time, a practice called “contract pricing.”
My cash policy was this: we would always have cash at least equal to two weeks’ sales. (I think this is called an “heuristic” decision in business school.) Any month we didn’t meet the test, I would borrow from Bank of America on a five-year term loan ostensibly secured by store fixtures. But I wasn’t borrowing for fixtures and inventory, as I took pains to explain to Bank of America. If I had enough cash to buy fixtures, I didn’t borrow. After 1975, I never borrowed again.
An entire chapter, “Crime Side Retailing,” could be written because that’s how I spent half of my time: dealing with crime with before-the-fact controls, and after-the-fact with detection and action.
One of the most important Supply Side constraints is the stamina of the Chief Executive Officer. I haven’t listed it above, but it’s there. And the sort of thing that wore down this CEO was year after year of employee theft.
It didn’t help that Sol Price had sold FedMart the previous year to another German capitalist, a sale that ended in an explosive exit by Sol, and the subsequent collapse of FedMart.
The calculus of what do I risk if I sell included the fact that Trader Joe’s was my Zen window on the world. I experienced the world mostly through Trader Joe’s. That’s an advantage of being self-employed. That window can never be as open while you’re an employee, even a Frederick-Forsyth rich one, even one given great discretion by absentee owners.
This is one of the most important things I can impart: in any troubled company the people at lower levels know what ought to be done in terms of day-to-day operations.
What I got out of it
A really fun, personal story of Trader Joe’s founding – truly caring about employees and customers, the power of high wages, the power of incremental improvements and always looking to bring innovative products at the cheapest prices, take a simple idea and take it seriously, principle of discontinuity, deep product knowledge, simple and consistent pricing (no games),
This book will help you accelerate your progress without expensive personnel or technological changes. It starts with raising your standards, aligning your people and culture, sharpening your focus, picking up your pace and transforming your strategy.
Most good companies operate well within siloes. Great companies do that and operate incredibly well across silos
A high trust environment is crucial. Admit failures, make sure you’re consistent and deliver on what you promise, focus on solutions to problems and not people
No customer success teams – person and team who owns a customer needs to be responsible for their happiness. Align incentives
Biz dev is for more unusual customer contacts. Sales is for highly repeatable sales processes. Over invest in lead gen before you invest in a big sales team. Lead gen, repeatable sales process, then sales team. Once you have that, invest aggressively in sales
Growth has shown to have extremely high correlation with value created. This should be the key focus for software companies, especially smaller, younger ones
You have to know your growth targets and what your growth levers are. What can you do to grow faster? Why not do that?
Execution is king but will only go so far if the strategy is off. Make sure that your operating executives are also the head strategists for their units. The CEO must also be the chief strategist
Hire drivers, not passengers. Get the wrong people off the bus
Attack weakness, not strength
Create a cost advantage or neutralize someone else’s
It’s much easier to expand a market than create a new one
Early adopters buy differently than late adopters. Aim for the early adopters first but then have to use those examples to lure in late adopters
Stay close to home in the early going – more resources and attention can be given to local customers and get better and more frequent feedback
Build the whole product or solve the whole problem as fast as you can
Architecture is everything
Prepare to transform your strategy sooner than you expect – as a leader, you need to operate well ahead of the current dynamic
Build a strong culture – it matters more than you think
It is the persistent actions, beliefs, behaviors of a group of people and sets the norms and standards
Through consecutive Hook cycles, successful products reach their ultimate goal of unprompted user engagement, bringing users back repeatedly, without depending on costly advertising or aggressive messaging. Trigger –> Action –> Habit (often, variable reward) –> Investment Phase
A trigger is the actuator of behavior—the spark plug in the engine.
Triggers come in two types: external and internal. Habit-forming products start by alerting users with external triggers like an e-mail, a Web site link, or the app icon on a phone.
Internal triggers manifest automatically in your mind. Connecting internal triggers with a product is the brass ring of habit-forming technology.
Following the trigger comes the action: the behavior done in anticipation of a reward. The simple action of clicking on the interesting picture in her news feed takes Barbra to a Web site called Pinterest, a “social bookmarking site with a virtual pinboard.”9 This phase of the Hook, as described in chapter 3, draws upon the art and science of usability design to reveal how products drive specific user actions. Companies leverage two basic pulleys of human behavior to increase the likelihood of an action occurring: the ease of performing an action and the psychological motivation to do it.
What distinguishes the Hooked Model from a plain vanilla feedback loop is the Hook’s ability to create a craving. Feedback loops are all around us, but predictable ones don’t create desire. The unsurprising response of your fridge light turning on when you open the door doesn’t drive you to keep opening it again and again. However, add some variability to the mix—suppose a different treat magically appears in your fridge every time you open it—and voilà, intrigue is created. Variable rewards are one of the most powerful tools companies implement to hook users;
For new behaviors to really take hold, they must occur often.
My answer to the vitamin versus painkiller question: Habit-forming technologies are both. These services seem at first to be offering nice-to-have vitamins, but once the habit is established, they provide an ongoing pain remedy.
Habits are not created, they are built upon
Our brains are adapted to seek rewards that make us feel accepted, attractive, important, and included.
With every post, tweet, or pin, users anticipate social validation. Rewards of the tribe keep users coming back, wanting more.
Fogg states that all humans are motivated to seek pleasure and avoid pain; to seek hope and avoid fear; and finally, to seek social acceptance and avoid rejection.
Consequently, any technology or product that significantly reduces the steps to complete a task will enjoy high adoption rates by the people it assists. But which should you invest in first, motivation or ability? Where is your time and money better spent? The answer is always to start with ability.
The factors that influence a task’s difficulty. These are: Time—how long it takes to complete an action. Money—the fiscal cost of taking an action. Physical effort—the amount of labor involved in taking the action. Brain cycles—the level of mental effort and focus required to take an action. Social deviance—how accepted the behavior is by others. Non-routine—according to Fogg, “How much the action matches or disrupts existing routines.”
the most habit-forming products and services utilize one or more of the three variable rewards types: the tribe, the hunt, and the self. In fact, many habit-forming products offer multiple variable rewards.
The last phase of the Hooked Model is where the user does a bit of work. The investment phase increases the odds that the user will make another pass through the cycle in the future. The investment occurs when the user puts something into the product of service such as time, data, effort, social capital, or money. However, the investment phase isn’t about users opening up their wallets and moving on with their day. Rather, the investment implies an action that improves the service for the next go-around. Inviting friends, stating preferences, building virtual assets, and learning to use new features are all investments users make to improve their experience. These commitments can be leveraged to make the trigger more engaging, the action easier, and the reward more exciting with every pass through the Hooked Model.
Dorsey believes a clear description of users—their desires, emotions, the context with which they use the product—is paramount to building the right solution.
To combat the trolls, the game creators designed a reward system leveraging Bandura’s social learning theory, which they called Honor Points (figure 20). The system gave players the ability to award points for particularly sportsmanlike conduct worthy of recognition. These virtual kudos encouraged positive behavior and helped the best and most cooperative players to stand out in the community. The number of points earned was highly variable and could only be conferred by other players. Honor Points soon became a coveted marker of tribe-conferred status and helped weed out trolls by signaling to others which players should be avoided.
The more users invest time and effort into a product or service, the more they value it. In fact, there is ample evidence to suggest that our labor leads to love. Together, the three tendencies just described influence our future actions: The more effort we put into something, the more likely we are to value it; we are more likely to be consistent with our past behaviors; and finally, we change our preferences to avoid cognitive dissonance. These tendencies of ours lead to a mental process known as rationalization, in which we change our attitudes and beliefs to adapt psychologically.
Asking users to do a bit of work comes after users have received variable rewards, not before. The timing of asking for user investment is critically important. By asking for the investment after the reward, the company has an opportunity to leverage a central trait of human behavior.
only because of the image itself, but because of her relationship with the pinner. Finally, Pinterest users invest in the site every time they pin an image of their own, repin someone else’s image, comment on, or like a piece of content on the site (figure 32). Each of these tiny investments gives Pinterest data it can use to tailor the site to each user’s individual taste; it also loads the next trigger. Each pin, repin, like, or comment gives Pinterest tacit permission to contact the user with a notification when someone else contributes to the thread, triggering the desire to visit the site again to learn more.
Actionable steps / questions
Walk through the path your users would take to use your product or service, beginning from the time they feel their internal trigger to the point where they receive their expected outcome. How many steps does it take before users obtain the reward they came for? How does this process compare with the simplicity of some of the examples described in this chapter? How does it compare with competing products and services?
Social acceptance is something we all crave, and Fitocracy leverages the universal need for connection as an on-ramp to fitness, making new tools and features available to users as they develop new habits.
The job of companies operating in conditions of inherent variability is to give users what they desperately crave in conditions of low control—a sense of agency.
Speak with five of your customers in an open-ended interview to identify what they find enjoyable or encouraging about using your product. Are there any moments of delight or surprise? Is there anything they find particularly satisfying about using the product?
Review the steps your customer takes to use your product or service habitually. What outcome (reward) alleviates the user’s pain? Is the reward fulfilling, yet leaves the user wanting more? Brainstorm three ways your product might heighten users’ search for variable rewards using: rewards of the tribe—gratification from others. rewards of the hunt—material goods, money, or information. rewards of the self—mastery, completion, competency, or consistency.
You are now equipped to use the Hooked Model to ask yourself these fundamental questions for building effective hooks: What do users really want? What pain is your product relieving? (Internal trigger) What brings users to your service? (External trigger) What is the simplest action users take in anticipation of reward, and how can you simplify your product to make this action easier? (Action) Are users fulfilled by the reward yet left wanting more? (Variable reward) What “bit of work” do users invest in your product? Does it load the next trigger and store value to improve the product with use? (Investment)
What I got out of it
A practical, actionable playbook on how to think about habit-forming products. Being thoughtful about each step provides a framework. What is the trigger (internal, external), what action does it induce, what is the variable reward and how often does it occur, how can you get customers to invest in the product (money, time, effort, brain cycles, etc…) to make it stickier
This book is about diversity, about the power of bringing people together who think differently (and accurately). In a complex world with emergent properties, diverse views help arrive at better solutions, insights, and questions
Perspective blindness – we have trouble seeing the frame of reference we live in (DFW water). Diverse perspectives can help make these frames of reference more visible. When the group is too homogenous, this blindness compounds – you not only stay in your frame of reference and it’s associated blind spots, but your certainty increases
The beard and campfire anecdote – American intelligence agencies discounted the threat Bin Laden posed because they saw his dress, appearance, mannerisms, and location to be backwards. However, people more familiar with the Muslim faith and culture more clearly saw the symbolism and meaning behind all of it. Homophily feels good and is easier, but doesn’t lead to the best solution as often as having diverse groups. In addition, it’s not just that you get to better answers, it also allows you to see options you hadn’t before
You want individual competency and collective diversity
When a strict dominance hierarchy is in place, teams led by jr leaders performed better on average than when Sr managers were in charge. Those lower on the hierarchy were afraid to say anything which cost more than the knowledge brought by the senior leader. You need to try to balance hierarchy and diversity this will give you a variety of perspectives and some decisiveness. Diversity when evaluating opinions, dominance once executing
Recombination of ideas is everything. It is better to be open to ideas and sociable than the greatest of geniuses. Creativity and connections
Tyranny of averages – too often the average truly doesn’t exist and is a dangerous fallacy
When compared to great apes, the only standout mental skill we have is social learning. We can observe others and immediately absorb and mimic. This is what allows our culture to compound
In a collaborative works, givers outperform in the long term by wide margins
What I got out of it
Diversity when evaluating opinions, dominance once executing. Creativity + Connections leads to Magic
Play nice but win was the ethos Dell got from his parents. His dad was a successful orthodontist and his mom was in investing. They had high expectations but stressed you also needed to act well in order to truly succeed
Silver Lake helped take Dell private in 2013. They’d need to raise $25 b, the biggest deal they’d ever have done up to that point, and made it happen
Michael has incessant energy, curiosity, and loved taking electronics apart. His family talked business and economics at home, rather than other surface level things.
Michael was entrepreneurial from a young age and used his hard earned money to buy an Apple II. The first thing he did with this expensive machine was take it apart. His parents were furious but his thought was
They have a decision making framework called facts / alternatives and choices / commitments to help them understand the landscape and try to make the best decision possible
What I got out of it
Fun to hear about the founding story of Dell, but found it mainly pretty fluffy
An in-depth overview of the private equity industry
The role, size, influence, and impact that the private equity industry has been on a steady upward trend for decades now. Many of the biggest firms now have 1m+ people working for them through their portfolio companies. The numbers and size are quite staggering
What I got out of it
A good history on some of the major PE firms – KKR, Carlyle, TPG, Blackstone, etc – and some of the major deals they’ve done
This book holds that the sequence technological revolution – financial bubble – collapse – golden age – political unrest recurs about every 50 years and is based on causal mechanisms that are in the nature of capitalism. These mechanisms stem from 3 features of the system, which interact with and influence one another
The fact that technological change occurs by clusters of radical innovations forming successive and distinct revolutions that modernize the whole productive structure
The functional separation between financial and production capital, each pursuing profits by different means; and
The much greater inertia and resistance to change of the socio-institutional framework in comparison with the techno-economic sphere, which is spurred by competitive pressures
The techno-economic paradigm is both a propeller of diffusion and a delaying force – it provides a model that can eventually be followed by all but this learning must eventually be overcome
It is precisely the need for reforms and the inevitable social resistance to them that lies behind the deeper crises and longer-term cyclical behavior of the system. Each technological revolution, originally received as a bright new set of opportunities, is soon recognized as a threat to the established way of doing things in firms, institutions and society at large
Old industries rejuvenated as well
New input (iron, steel, chips) reaches mass scale economics which creates massive price drops and it can therefore spread further
All areas of society are interconnected and impact each other – technological, social, political
Big bang leads to irrational exuberance which leads to structured adjustment, then installation period (irruption and frenzy), and eventually to deployment (synergy and maturity)
How new tech goes to third world and financial / debt’s role
Financial capital plays a crucial role all along. It first supports the development of the technological revolution, it then contributes to deepen the mismatch leading to a possible crash, it later becomes a contributing agent in the deployment process once the match is achieved and, when that revolution is spent, it helps give birth to the next
Regulation is the last part that is needed as part of the cycle
Monopolies, oligopolies in phase 4 must try radical innovations to stretch lifecycle, reduce cost of peripheral activities
Installation leads to turning points which leads to deployment
The turning point has to do with the balance between individual and social interests within capitalism. It is the swing of the pendulum from the extreme individualism of Frenzy to giving greater attention to collective well-being, usually through the regulatory intervention of the state and the active participation of other forms of civil society
Related services, cultural adaptation, education, regulation all come up
Becomes ubiquitous, common sense which leads to coherence. When exhausted and tired, ripe for new paradigm
Financial vs. Production Capital
Financial capital – invest, money to make more money
Production capital – builders, scaling more profit, making capacity
Little knowledge in an area vs. a lot; foot loose vs. roots
When productional capital is in control (post bubbles) it leads to real wealth creation
Financial capital should be the facilitator, not the game itself
When the companies (engines of growth) start seeking unorthodox ways to deploy their profits, that stage is at maturity (M&A, conglomerates)
In maturity, financial capital also becomes unorthodox. Idleness leads to bad loans
Provides the funding for the next paradigm
Taking a successful behavior to its extreme causes failure
Big crashes teach big lessons, but are often short lived
Cost reductions in the core inputs/infrastructure leads to further explosion
What I got out of it
Love seeing and learning about these centuries-wide deep dives that helps stitch together patterns. The cycle from irruption to frenzy to tipping point to synergy and finally maturity plays out time and again and having the image and jargon to think about it is so useful
This book is about understanding, defining, and influencing where your customers are going and who they want to become when they get there. The Ask offers a lightweight but high-impact methodology for aligning strategic, marketing, brand, and innovation leaderships around customer transformation. That transformation comes from innovatively investing in who you want your customers to become.
Innovation is an investment in human capital—in the capabilities and competencies of your customers. Your future depends on their future.
Innovation is about designing customers, not just new products, new services, and new user experiences.
Customer vision is as important as corporate vision. Your corporate vision and mission statement should respect and reflect your vision of the customer.
Align customer vision (what you want your customers to become) with user experience (what you are asking them to do).
If you can’t be your own best beta, find and design the customers who can.
Anticipate—and manage—the dark side of The Ask.
Customers don’t just adopt innovations; they alter them, adapt to them, and are changed by them. Like economic Charles Darwin’s, successful innovators strive to observe and understand how their customers evolve.
Successful innovators don’t just ask customers and clients to do something different; they ask them to become someone different. Facebook asks its users to become more open and sharing with their personal information, even if they might be less extroverted in real life. Amazon turned shoppers into information-rich consumers who could share real-time data and reviews, cross-check prices, and weigh algorithmic recommendations on their paths to online purchase. Who shops now without doing at least some digital comparisons of price and performance? Successful innovators ask users to embrace—or at least tolerate—new values, new skills, new behaviors, new vocabularies, new ideas, new expectations, and new aspirations. They transform their customers. Successful innovators reinvent their customers as well as their businesses. Their innovations make customers better and make better customers.
Google continuously improves the quality of its search by improving the capabilities of its searchers—and vice versa. As Google’s searchers grow smarter and more sophisticated, so does Google. Win/win.
What does our proposed innovation ask our searchers to become?
“The entire corporation must be viewed as a customer-creating and customer-satisfying organism. Management must think of itself not as producing products but as providing customer-creating value satisfactions . . . In short, the organization must learn to think of itself not as producing goods or services but as buying customers, as doing the things that will make people want to do business with it.” The innovator’s ask refines and reframes Levitt’s organizing insight. What business a company is in depends, in large part, not on existing customers but who tomorrow’s customers will—and should—be.
Who do our customers want to become? What kind of customers should we be investing to create? What kind of customers will our innovations “buy”?
Let’s update Becker’s comments in light of how innovation transforms its beneficiaries. Perhaps the innovator’s most important assets “by far” aren’t its employees. Suppose its most important asset is its customers, and how it invests in its customers, how it treats its customers, how it raises the skill level of its customers. Maybe that’s a dominant factor determining whether this business is going to succeed.
Innovation should be an investment narrative explaining how customers become more valuable.
Google brilliantly reinforced its “innovator’s ask.” Its innovations asked customers to become people who expected immediacy. Google’s UX economics made search faster and easier. Users could literally do more in less time. Speed enabled and accelerated how Google transformed customer expectations. A Pavlovian would say Google conditioned its searchers to immediate gratification.
Conventional management wisdom has evolved from thinking about innovation as designing for customers, to innovation as designing with customers. The Ask takes the next essential leap: thinking about innovation as designing customers. Innovation should be treated as a medium and method for (re)designing customers.
Training people to use shopping carts not only transformed how shoppers shopped, but increased how much shoppers bought.
Visionary organizations that value innovation should have simple customer vision statements. They need to imagine—and articulate—who and what their customers should become.
What customer values, expectations, perceptions, or behaviors does your vision transform? How do your innovations enable your customers—or key customer segments—to achieve this? Your innovations are investments in realizing the customer vision.
Apple trained its customers to become design connoisseurs.
Microsoft’s innovation asked for real commitments of time, thought, and effort. What did Windows innovation upgrades and updates ask customers to become? Experts. Microsoft’s complex—and complicated—flow of feature and functionality innovation asked customers to become students of Windows. Was this a stupid ask? Absolutely not. It created commitment.
For Apple’s and Pixar’s innovators, the value of self-awareness trumped any need for customer focus. By designing for themselves, they transformed their most demanding customers.
The “being one’s own best innovator/customer” paradigm enjoys a fantastic business history. Henry Ford, George Eastman, and Edwin Land were all DIFY—do it for yourself—entrepreneurs.
All innovations come with risk. But the dark side of The Ask is not about the innovation’s riskiness but the customer weaknesses and vulnerabilities that innovation might expose. To argue that these innovations represent inherently bad investments overstates the case. But the inherent nature of these asks means these investments can lead to bad outcomes for both customer and innovator.
The Ask shouldn’t be monolithic; it’s an invitation to segmentation. Customers and clients aren’t created equal.
What I got out of it
Fascinating way to think about innovation and asking the simple question of “who you want your customer to become” can be insanely clarifying and focusing.
Types of opportunities – paradigm shift, new product / business model / me-too product
Opportunity recognition – markets that change and are receptive to change, badly understood (big and misunderstood), fast growing, incumbent players cannot move, little competition
Process of Opportunity Recognition – intuitive, analytical
Seek a mission-critical pain killer, not a vitamin
Be extremely specific in defining your customer
Great entrepreneurs tend to be generalists – breadth > depth
Founders need to understand the market, product, and execution. Need to be focused on value creation, not control
Risk Identification and Elimination – raise money to reduce key risks – market, technical, people, financial
Decision making – the implementor should be the decision maker
Flexibility – In the planning process, understanding the variables is more important than the plan. It is as important to understand the other players’ plans as it is to figure out your own plans
Focus is paramount – with limited time and resources, specialization is key – should be saying “no” to 9/10 things
Focus and speed are a startups’ key advantages
Split every problem to its smallest atomic problem
Be as useful as you can to others, have vision, form win/win alliances
Focus all your efforts to satisfy the first 20% of the market segment. the others will follow
Design partners, best references, proven success
People – overqualified so the company can grow into their skills
Processes must be scalable – at some point speed becomes a liability and the need to build systems to scale operations becomes obvious
Management needs to live 3-6 months in the future
What I got out of it
Interesting that Oliver Samwer, of Rocket Internet, started his entrepreneurial career from an academic angle. He certainly doesn’t abide by all the lessons – culture, for example – but fascinating to see the lessons he pulled out and applied (ruthlessly)