Fuel your growth by breaking free of compromises

“  Translate Customer Dissatisfactions into New Value “

GEORGE STALK

March 23, 2009

Many companies today are searching for growth, but finding it difficult. One powerful way to grow is through innovations that break the fundamental "compromises" of a business.

Compromises are concessions demanded of consumers by most of the companies in an industry, and occur when an industry imposes its own operating constraints on customers.

Customers usually accept these compromises as the way a business works - in essence, something that must be endured.

A compromise is different from a tradeoff. In choosing a hotel room, for instance, a customer can trade off luxury for economy by choosing a Best Western over a Ritz-Carlton.

Until recently, however, most hotels forced all customers to compromise by not permitting check-ins before 4 p.m. No law of nature or economics decrees that hotel rooms can't be ready before late afternoon. After all, rental cars are available almost any time, day or night.

When a company successfully breaks a compromise or even several at once, it releases enormous trapped value. Breakaway growth can be the result.

A pathway to growth

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

By focusing on compromises, a company can continuously uncover fresh opportunities and sustain growth.

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

But Schwab didn't stop there. Next, it broke the compromise set up by the discount brokerage houses themselves. These new firms offered low prices, but most provided unreliable service.

By investing in computer technology that allowed almost immediate confirmation of orders over the telephone, Schwab was able to combine low prices with levels of responsiveness unusual for its industry. Subsequently, Schwab added convenience, flexibility and ease of transferring funds to its value proposition by providing 24-hour-a-day, seven-day-a-week service, the Schwab One cash management account, and automated phone and electronic trading.

Recently, Schwab has used its compromise-breaking capabilities to enter the mutual fund business. Most people invest in several fund families to achieve diversification. Diversification, however, often comes at the price of frustration. It means dealing with a confusing variety of statements, rules and sales representatives.

In 1992, Schwab introduced OneSource, a single point of purchase for more than 350 no-load mutual funds. In the more than 20 years since its founding, Schwab has evolved from a simple discount broker to a comprehensive self-help financial supermarket, and has generated an annual growth of 20 to 25 per cent.

Creativity, Flexibility, Nerve

For a company to grow by breaking compromises, it must have the creativity to translate customer dissatisfactions into new value propositions, the flexibility to engage in constant reorientation of its business system and the nerve to challenge business-as-usual in its industry.

There are three basic steps:

Get inside the customer experience

Start by asking your managers and employees to immerse themselves in the customer's experience. It is critical to develop a visceral feel for the compromises consumers encounter when they do business with you. Apple's continued success with new products like the iPod and iPhone is more about its superior understanding of user interface and the frustrations felt by consumers using MP3 players, cellphones and PDAs than it is about leading-edge technologies.

A compromise often becomes visible when customers have to modify their behaviour to use a company's product or service. So pay special attention to the compensatory behaviours customers engage in to get around the constraints that your product or service imposes on them.

Travel up the hierarchy of compromises

Once the organization is focused on the customer experience, learn to recognize three different types of compromises, each with increasing potential to create value.

Some of the most obvious can be found in your company's existing products or services.

Other, more powerful compromises can be found at the level of an entire product category. The most powerful compromises are often the hardest to identify: Broad social dissatisfactions that may have little to do with your product or industry, but a lot to do with how your customers live their lives.

The protection industry (life insurance, et al.) is a product and service that frustrates consumers in its difficulty in understanding and purchasing - from the product itself, to its sales process, to the industry's lack of flexibility on terms.

This industry is ripe for an iPod-like innovation.

Reconstruct your value chain

Defining new value propositions for the customer is necessary, but not sufficient. You must also use the compromises you break to redefine the competitive dynamics of your industry - to ensure that the economic value liberated by compromise-breaking flows to you rather than your competitors.

Zappos.com, the e-retailer of shoes, is a prime example. Zappos offers thousands of choices of shoes for home delivery. What sets them apart is that they have a one-year return policy. They encourage customers to buy multiple sizes and colours and return - in a prepaid envelope - the shoes they do not want. This is a completely new value chain that sidesteps traditional shoe distribution and retailing.

To break compromises, executives must first break with the conventional wisdom of their industry - about customers, conventional industry practices and the economics of the business. When they do, faster growth and improved profitability are the result.

George Stalk Jr. is senior partner and managing director of Boston Consulting Group of Canada Ltd. and adjunct professor of strategic management for the Rotman School of Management at the University of Toronto.