Why is it that companies operate the way they do? What happens when new players enter an industry, or a major competitor changes the rules of the game?
Richard illustrated this with examples from several industries, and with a bit of economic theory too.
For example, why is it that hotels have fixed check-in and check-out times? Turns out, it’s mostly about the cleaning schedules. Yet the cost associated with cleaning is only a small fraction of the value of the customer’s stay. One company, operated by renowned hotelier Horst Schulze of West Paces Hotel Group, is innovating by doing away with fixed check-in and check-out times. Why not just organize your hotel stay based on your schedule as a guest? Now that’s an innovation.
Richard pointed out that most big changes tend to come from entrepreneurial companies and new entrants. But innovation isn’t just about products! The first three examples he chose were all, essentially, about distribution channels:
- Avon: Started by David McConnell in the late 1886, and first branded as Avon in 1928, was a major innovation in the sale and distribution of cosmetics...as Richard described the Avon model which leveraged personal networks and social relationships, I realized that social networking (just like word of mouth) is nothing new!
- Dell: Michael Dell decided that the notion of selling computers through dealers might not be the best model. This led to one of the biggest innovations in high tech distribution with Dell’s online "built to order" processes, that have changed IT purchasing and the computer industry.
- Amazon.com: Want to buy a book? If you’re my age, you remember the days where you had to call around to see which bookstores had the book you wanted in stock. Or you had to wait until they could order it from the publisher or from another bookstore. As Richard put it, "Going into a bookstore had its limitations on choice, convenience, and price." Honestly, my kids wouldn’t have a clue what the fuss is all about. Amazon has changed distribution for books, and many other categories of products, by moving the shopping experience online.
But Richard’s biggest innovator accolades went to Wal-Mart. Walton’s original idea was to be an innovator in distribution. He used to fly his plane around the US, and look for small towns with lots of homes but no large stores. As Richard put it, "He brought choice, distribution, and price efficiency to lots of cities where this simply didn’t exist."
My Own Experience at Wal-Mart
After hearing Richard's talk, I was writing this summary and reflected back on my own experience with Wal-Mart.
I was in the midst of that revolution growing up in Oklahoma, not far from Wal-Mart headquarters in Bentonville, Arkansas. What Richard failed to point out was the incredible tension this created in rural communities, where the Wal-Mart store put many small retailers out of business. But even if you had friends in small town retailing (we did!), you had to eventually accept the reality that Wal-Mart simply offered a better overall mix of choice and value…which was what the customer wanted.
In fact, I experienced it first hand, working in one of my first jobs as a cashier at Sam’s Club, Walton’s warehouse retailing giant. I was always amazed at how far people would drive from surrounding communities to buy products at the Sam's Club where I worked. This was Walton out-selling himself! What the local town Wal-Mart couldn't deliver, they could get by driving to the nearest Sam's Club (even better prices as a member).
I even had the pleasure of meeting Sam Walton himself when he stopped in at the Tulsa store on 46th and Sheridan Road, where I worked…driving up in his pickup truck, decked out in a baseball cap and jeans (yes it is true what they say about him). He was already the richest man in America in those days, thanks to his innovative approach to business, but I think he stayed true to himself. And he understood what the average person in a small town needed.
Richard Discusses Exceeding Expectations (aka The Zone of Tolerance):
As Richard noted, Walton had 10 rules for doing business, and rule number 8 was "Exceed your customer’s expectations. Give them what they want, and then give them a little more." It’s similar with Net Promoter. The only way that you can really create lots of Promoters is to redefine what people expect in your industry, or by significantly exceeding their expectations so that the customer notices.
Richard illustrated this idea of "exceeding expectations" by asking two volunteers up on stage. As research has shown, expectations are grounded at a certain level based on what consumers know from an industry, and there is also a higher level that defines what consumers really want. Researchers have called this the "zone of tolerance." But this range of expectations moves around. It moves with Price, first of all. It also moves based on what people experience from other companies.
In most industries, the players sit in the center of the zone of tolerance. But what happens periodically, is that companies completely redefine what people want by delivering a new type of experience, and this is a key factor in generating legions of promoters. This is what major innovators like Avon, Dell, Amazon, and Wal-Mart have done in their day.
Richard also went into a discussion of Game Theory, and how the interactions between companies tends to lead everyone to the "middle" of the zone, generating lots of passives. Think of this as a sort of, "lock in" with standard operating procedures, making it hard for companies to break away from the pack. Even if you try to make a big change, it can be incredibly hard to get your operations to adopt the change.
But occasionally, this balance is disrupted by an entrepreneur (from the outside) or (more rarely) by a major change from the inside. He used GM as an example of a company in crisis that has had the impetus to start major change. They are working on two major innovations right now. The first is a money-back guarantee. This is common for some smaller purchases, but it’s a big change for auto purchases. He rated this one with a thumbs up.
The second innovation they have tried is to sell cars online, using an eBay auction. They ran this experiment for 6 months recently (click here for Richard's blog about it when it was first announced), but it didn’t pan out well.
What went wrong? Richard believes this failed primarily because they didn’t complete the innovation…they just routed people into the dealership, and it was back to standard operating procedures again. This illustrates the difficulty of making change happen.
The airlines seem to be moving in the opposite direction, by charging for bags. "Is it a race to the bottom?" Richard asked. Luckily, not everyone is playing the game. As Richard pointed out, "Southwest now can create Promoters by doing absolutely nothing at all!" "Bags fly free" is now a differentiated experience, and Southwest is advertising about it.
Other great innovations Richard pointed out included:
Reed Hastings founded NetFlix because he hated the fact that Blockbuster was making money off of him by charging late fees. So he innovated in the other direction, redefining what people expect from home movie rentals. I've got some more thoughts on NetFlix in this blog post.
Online dating websites: why limit your choices to people you happen to meet through your personal network? Online dating websites have changed the paradigm for this completely.
Richard ended with a challenge for conference attendees in their own businesses. What is happening in your company and your business that relies on industry status quo? Are you a victim of living in the zone of tolerance? How will you break out of it? That’s some food for thought as we kick off the conference.
Sam Walton quotable quote (courtesy of Richard):
"Swim upstream. You should go the other way and ignore the conventional wisdom."