Thinking Smarter Inside the Box

Even great companies lose their way. Consider Procter & Gamble. By the late 1990s, P&G was one of the best known, most successful and most admired companies in the world. Yet in the final years of the last century, following a programme of 'innovation, stretch and change', P&G lost 50% of it value, a staggering $70 billion.

Under the ambitious 'Organisation 2005' programme, the company temporarily lost sight of the basics – investing heavily in their big brands – by diverting resources into a myriad peripheral activities.

For decades P&G had been an exemplary inside-the-box player with a well-earned reputation for continuous product innovation. While much of P&G's innovation was in-house, brands like Pampers were not invented by P&G. The P&G genius was to recognise the market, invest heavily behind the brand and continue to innovate. Its approach had been evolutionary, not revolutionary. (Editor's Note: See Martin Deboo's article describing how P&G is increasingly pursuing innovation more collaboratively.)

Now, it has regained its strengths. Under the current CEO, AG Lafley, it has adopted a low-key, back-tobasics approach. 'Even when you've got a complex business, there's a core, and the core is what generates most of the cash, most of the profits. The trick was to find the few things that were really going to sell, and sell as many of them as you could,' says Lafley.

The point of this story is not that any old company can lose its way. Many do. Nor is it that, with determination, any old company can recover from a diversion. Many cannot. We are not describing just any old company. We are talking about Procter & Gamble, an outstanding company with $55 billion in revenues and more than 100,000 employees in 80 countries. The point is that, however good you are, it is easy to become distracted. Remaining energised to achieve and sustain growth is hard work, requiring continuous attention.

It can be done. Here are six straightforward rules to help companies think smarter inside the box.

RULE 1

Think Category Benefits, Not Unique Brand Benefits

In the late 1980s, a student at London Business School summarised what he had learned with the words 'the Japanese do it better'. Today, the Japanese economy is in a rut, and its exporters have difficulty competing overseas, but the best Japanese companies, such as Toyota, Honda and Canon, are still world leaders, especially in product innovation, manufacturing techniques and quality control. Their continued success is all the more remarkable given the difficult conditions under which they operate: a depressed domestic market, ferocious competition (especially from other Asian companies), a high exchange rate, and the fact that others in those industries have now had more than a quarter of a century to copy their approach.

Perhaps it is time to look again at the books on Japanese management that have been gathering dust since the late 1980s. While Japanese management mainly focused on the manufacturing function, we argue that the approach should be applied to every function in every industry. In particular, there are often opportunities to improve service quality – and every business is at least partly a service business in the minds of its immediate customers.

In addition, Japanese management theories, such as TQM, and especially kaizen, tend to take an internal, engineering-driven focus. As applied by a company such as Toyota the benefits are there for all to see. As consumers, we should all be grateful for the resulting improvements in price performance and reliability we now take for granted in so many products. We believe that this internal process focus needs to be complemented by an external focus on customer needs and especially on those needs that are not well met. Hence, we focus on customer dissatisfaction with the whole category (not just with your brand) to counter complacency and to suggest specific opportunities for improvement.

Compelling examples abound: Shell's discovery that many customers would switch to a petrol station with a clean bathroom; or Virgin Atlantic's launch on the premise that, since consumers find long-haul flights boring, they will appreciate decent movies and an ice cream before landing; or Orange's launch based on a reliable network and proper customer service. So Rule 1 is to focus on what customers like – and especially dislike – about the category, not just about your brand and your competitors' brands.

RULE 2

Think Simplicity Not Sophistication

Shell sees itself as a company that aims to meet the energy needs of society in ways that are economically, socially and environmentally viable, now and in the long term. Most of us, however, think of Shell as a supplier of fuel and lubricants at our local petrol station, and as an oil and gas explorer and producer. We know that Shell is huge and global. We are less aware of its gas and power-marketing business, it chemicals business, or its emerging hydrogen, solar, geothermal and wind energy business.

You may, however, be quite surprised to learn that Shell is also one of the world's largest single-branded retailers. Its global network services some 25 million customers a day in more than 56,000 service stations. (see Figure 1)

Pat O'Driscoll was certainly surprised to learn those statistics. The well-kept secret of Shell's retailing scale did, however, explain why a headhunter working on behalf of the company's global retailing business was calling her. O'Driscoll's retailing credentials could hardly have been better. She had spent her managerial career at Tesco, Safeway, and Marks & Spencer. O'Driscoll was sufficiently intrigued by the challenge described by Shell that she joined in 1997. After an initial 18 months working with the team developing the global retail strategy, she was assigned to oversee the $30 billion European retail operation – and its 14,000 petrol stations – to implement some of the proposals and methods that she and the team had developed.

The initiative was challenging because the company had to introduce so many front-line employees to the new approach. The change involved many difficult steps, including closing almost half the existing outlets and coping with the inevitable short-term dip in employee morale. Employee scepticism changed, however, when the initiative started producing results. (see Figure 2)

Transparency, simplicity and consistency were key. For example, in the past, regional managers were hammered on costs, yet many stations were supposed to be open 24/7, despite seeing virtually no customers for six to eight hours. Local managers were empowered to do what made sense, as long as they excelled on the basics. Morale shot up.

Understanding its customers' priorities and ensuring that they were consistently satisfied on the basic attributes enabled Shell to become their preferred refuelling option. The initial performance improvement of 20% increase in like-for-like sales in Shell's major European markets settled down at about 10%. Return on capital, which had been zero prior to the initiative, soon reached double digits and exceeded targets.

RULE 3

Question the Addiction to Novelty and Change

The alarm bells went off when, a few years ago, a senior executive (let's call him 'Jim') at a major consumer-goods company congratulated one of us on our counterintuitive thinking. Having spent the day explaining how customer value orientation works to enhance business performance, we were surprised by his reaction.

Jim's business, it turned out, was the cash cow of his organisation. In his five years in charge, he had consistently delivered on-target earnings. His market share was high and stable, and customer satisfaction ratings were so high that other business unit heads had ceased to benchmark against him. Colleagues, however, suggested that the business's success was attributable not to Jim's management but rather to the colossal brand he had inherited. They would regularly ask, 'What has Jim done with the business? Where are his radical innovations? Doesn't he realise that if he continues with the old model, the competition will overtake him?'

Jim believed the managers had increasingly become thrill-seekers who had lost sight of the fundamental economies of risk. Executives from all disciplines multitasked, coordinated, visioned and strategised. Simply taking care of the business had somehow become passé. With no meaningful acceptance of the downside inherent in risk, Jim argued, the trend-conscious executive was addicted to novelty.

Between exploring web opportunities, sizing up the next acquisition, restructuring the balance sheet, partnering, venturing and outsourcing what they once thought was their core activity, managers had taken their eyes off the ball. They had been encouraged to do so and were often rewarded irrespective of outcome. They were excited. They were lost in their exploration of the new futures they would fashion. Who could blame them? They had, after all, been endlessly encouraged to think creatively, out of the box. They had repeatedly been urged to break the rules.

All this made Jim feel like a dinosaur. What excited him was creating value for his customers, one at a time. Although the revenues of Jim's division exceeded $2 billion, he knew all of his major customers (large retailers), their businesses and their issues. His knowledge of consumer trends, and his ability to understand how and why they evolved as they did were legendary.

He was intimately involved in product development and, with his team, had created an operations and fulfilment capability that was the envy of the industry. He was, simply, a profit-and-loss man, a complete business manager. He knew how to build and nourish a mature business, getting everyone enthused about creating customer value. 'Simple blocking and tackling' is how he put it to us. What is counterintuitive about that?

Is it not about time managers spent more effort thinking about the basics of their businesses, more effort thinking about real customers? Is it not about time they saw that we – the customers – are easy to please? We simply expect companies to deliver on their promises. Too many managers have spent so much time outside the box now that they have forgotten how good it can really be when they strive to be simply better.

RULE 4

Think Opportunities, Not Threats

Business success is elusive. When you find it, you should enjoy it. The other side of the addiction to novelty and change is the quite different trap of inaction due to complacency and of paralysis due to excessive caution.

Complacency born of security makes no sense at all. Demographic evolution changes your customer base over time. Technological innovations open up new possibilities. Consumer preferences evolve. Moreover, categories themselves evolve. Of course, existing and new competitors are out to steal your lunch. All these forces, and more, will impact every business.

Inaction due to insecurity can be even worse than inaction due to complacency. When, over the years, customer response confirms that you have found a great way to execute and that your offer is valued highly, there is an understandable fear of rocking the boat. Opportunities to evolve, by, for example, adopting a new technology, come along.

The pressure not to adopt them stems from the fear that doing so will probably cannibalise your existing business. We suggest that what distinguishes those companies that take the risk and adopt the new technology is that they have a superior understanding of what customers really want. Take Gillette – now itself part of P&G.

Gillette first created (in 1903) and then dominated the mass market for disposable safety razor blades. In 1962 its position appeared unassailable, with a remarkable 72% market share. Yet, within just one year, it had lost almost a third of this to the small British company Wilkinson Sword, whose new stainless-steel blade lasted three times longer than Gillette's carbon-steel blade.

Gillette had been aware of the new stainless-steel technology for some time and had even licensed some of it to Wilkinson Sword. But Gillette had been reluctant to adopt the new technology. Why? Because doing so would have rendered obsolete much of Gillette's manufacturing capacity for carbon-steel blades. Wilkinson might have taken over the whole market if it had had enough capital.

But ultimately, as researchers Gerard Tellis and Peter Golder note, 'The Wilkinson experience galvanised Gillette to innovate even at the cost of cannibalising its own established products.' Tellis and Golder are referring to Gillette's Trac II twinheads razor (1972), Atra pivoting-head razor (1977), GoodNews twin-blade razor (1978) – a response to a serious threat by Bic disposable razors – and Sensor, a razor with twin blades that move independently (1989).

Now, years after the Wilkinson threat, innovation is 'almost an obsession' at Gillette. Gillette's perspective on what it takes to win is rather telling. The key, it says, is to 'provide benefits people think are worth paying for' – generic category benefits such as a quicker, closer, more comfortable shave. Gillette brands are supported by a corporate-wide understanding of customers' most basic category requirements and, therefore, of what R&D should focus on.

Whether potential changes are caused by new technology, government intervention, a changing customer base, or whatever, think of them as opportunities, not threats.

RULE 5

For Creative Advertising, Forget Rule 3

If your essential proposition is to meet basic category needs better than the competition, you may have a problem making yourself heard. The solution is to adopt a distinctive approach to persuading sceptical customers that you have addressed their core needs and created a business system to provide those needs better than your competitors. This is where you or the creative people at your ad agency really do need to think outside the box.

The car maker Daewoo did this to great effect. As part of its strategy, it needed to persuade UK motorists that, because Daewoo sold direct rather than through dealers, they would experience a hassle-free buying process, peace of mind and courteous after-sales service. When Daewoo tested its concept, it felt the full force of market cynicism. Car buyers had heard it all before.

In addition, Daewoo had to make itself heard in a very heavily advertising market. With a combined market share of 51%, the three largest manufacturers each spent anything from £25 million to £50 million annually advertising on network TV, in the national press and on billboards. Daewoo's launch budget was £10 million. It used humour throughout its campaign along with reinforcing its simple message: we're on your side. Indicative of its approach is the competition it ran offering viewers a chance to become one of 200 guinea pigs – drivers who would be given a free Daewoo for an extended year-long test drive.

The ad opens with a close-up of a man telling the viewer about Daewoo's offer. On his mentioning guinea pigs, 200 of the little creatures appear. He gives up, leaving the voice-over to restate the message and invite the viewer to participate. The offer, together with its advertising execution, captured the market's attention: 200,000 people called the toll-free number to be a guinea pig, totally swamping Daewoo's phone lines.

RULE 6

Think Immersion, Not Submersion

Immersing yourself in the realities of your marketplace is not just a way to find and prioritise opportunities. It is also key to energising your organisation and keeping it focused on what really matters. Our advice? Insist that the whole company, not just the top management and the sales and marketing people, gets regularly immersed in the market. The more you do that, the more successful you will be in creating a customerfocused mindset. There is no substitute for direct market access from the top to the bottom of your organisation.

Is it unusual for senior executives to be out of touch? No. Simple economics argues in favour of specialisation. But distance and specialisation carry hidden costs, reinforced by the fact that people tell the boss what they think he or she wants to hear, so problems get buried rather than discussed and addressed. Shareholders may sympathise with the idea that top management should focus on the 'grown-up' tasks: corporate strategy, resource allocation, investor relations, corporate communications and running the overall business. Managers today work long hours at a relentless pace. It is hard not to drown in the workload.

But senior managers are well paid and get plenty of support at work and at home, so they do not have to spend time on the mundanities of day-to-day living such as doing the laundry. Do executive vice presidents at any car company actually shop around for their own cars? Do senior bankers have to go through what the rest of us have to in order to get a mortgage?

In the name of efficiency, senior executives generally outsource most of what they regard as distractions to support staff at work and at home. But some of these distractions are, in fact, the stuff of opportunity. They are sources of the unpleasant and unreasonable frustrations consumers experience every day: the broadband connection that gets disconnected by mistake; the franchised car dealer that keeps you waiting half an hour to get your car back after servicing; the beautifully packaged toy that breaks into pieces when the birthday child unwraps it.

What to Do Next: Go to Your Calendar

• How many whole days in the next four weeks are dedicated to interacting with buyers (those that make decisions to acquire your product or service) and with users or consumers (those who use it)?
• Now clear your schedule. In the next month, make it a priority to visit customers on their own turf – big and small, near and far, new and old, and especially dissatisfied and lapsed customers.
• Focus on observing and talking to customers where and when they buy and use your brands and your competitors' brands.
• As you struggle to find space in your calendar, remember Rule 6: it is immersion in the customer experience, not submersion in your other workload that matters.
• Although administration, resource allocation, and high-level strategy are important, take them in moderation.

Bite the bullet. You may be surprised by the impact.

This article featured in Market Leader, Spring 2006.

NOTES & EXHIBITS

FIGURE 1: A SHELL PETROL STATION IN DUBLIN, IRELAND. SHELL DRAMATICALLY IMPROVED THE SUCCESS OF ITS RETAIL SITES BY UNDERSTANDING AND MEETING ITS CUSTOMERS' PRIORITIES.

FIGURE 2: THE LATEST GILLETTE SENSOR RAZOR. GILLETTE IS A COMPANY THAT HAS LEARNED TO INNOVATE CONTINUOUSLY.