Sheryl Sandberg has recently offered advice for talented, career-savvy women: Do what successful men do and work. A lot. I was especially struck by her recommendation to “lean in” given end-of-life surveys which consistently rank “working too much” as one of the biggest regrets in life. Men especially “…deeply regret spending so much of their lives on work…and missing their children’s youth and their partner’s companionship.” In economic terms, many professionals – and men in particular – discount the opportunity cost of all that work until it’s too late for anything but regret Yet this is the unbalanced life that Sandberg extols and follows herself.
This post won’t argue that working long hours isn’t good for your career; it is. But why does working long hours enhance your career? What are the assumptions underlying that relationship, and are those assumptions valid? If not, why not, and what is the true relationship between work, productivity, and value?
Perceived Relationship Between Hard Work and Career Growth
For most, a life spent at – and on – work isn’t the goal but the means to an end: Money, prestige, opportunity, early retirement. At its core, the “work more” rationale is that combining talent and hard work leads to business results which make an employee valuable. In other words, hard workers make a positive impact on the business and are therefore rewarded with career growth. Here’s the assumed relationship:
Talented employees take on increasing levels of responsibility (more on their plate), which leads to heavy work loads and long hours. Those long hours result in getting a lot done – superior results – which leads to career growth. Sandberg’s belief is that without loading up our plate – and working long hours – we can’t deliver results that lead to outstanding career success.
Sandberg’s perspective is widely shared today. Researchers interviewed corporate managers about their perceptions of their employees. Employees who came in over the weekend or stayed late in the evening were seen as “committed” and “dedicated” to their work. A typical comment: “Working on the weekends makes a very good impression. It sends a signal that you’re contributing to your team and that you’re putting in that extra commitment to get the work done.”
I’ve seen – and regret to say, implicitly encouraged – this perspective, especially early in my career. However, having worked with all sizes and manners of companies as a consultant, I’ve come to the conclusion that many of these assumptions are incorrect. In this post I’d like to explore the true relationships between working long hours, getting stuff done, and results.
The Relationship Between Hours Worked, Productivity, and Results
Whether you work long hours enthusiastically or begrudgingly, the assumption is that your effort creates value and benefits your organization. Because if it doesn’t – if companies aren’t better off, or are even worse off when their employees work long hours – then the personal sacrifices are not only painful but unnecessary and counterproductive.
The relationship between hours worked and productivity isn’t linear; an extra hour of effort often leads to different levels of output. Over the course of a day/week, these returns begin to decline, as we get tired and distracted. Work long enough and returns become negative: An extra hour of work actually destroys value, whether it be a defective widget, a flawed business strategy, or anything in between.
So when do we become unproductive? Turns out there’s 150 years of research (see here, here, and here) for blue collar workers: 40 hours per week. We see this in Figure 1 above (point B). Note that our most efficient productivity (point A) occurs at 25 hours – about 5 hours per day.
Blue collar productivity is pretty easy to assess. While the productivity of knowledge workers is harder to pin down, recent research (see here) estimates knowledge workers maximize productivity around 30 hours per week. Thinking requires more focus than sweating.
There is a caveat to these findings: They apply over the long run. Research shows that there are short-term increases in productivity from working longer hours. Below we see the productivity impact of working consecutive 60- and 80-hour work weeks compared to the 40-hour baseline.
In a 60-hour week, maximum productivity occurs at 4 weeks, while breakeven productivity occurs at 8 weeks. (In other words, work 60-hour weeks for 8 straight weeks and you’ll get as much done as if you’d just worked 40-hour weeks the whole time.) Similarly, productivity maximizes at 2 weeks in 80-hour weeks, while breakeven productivity occurs just one week later. Notice also that it takes a week for productivity to recover from an 80-hour week.
Employees that brag complain about how crazy busy they are should really be apologizing for the mess they’re creating. And Sandberg’s boast that “…the days when I even think of unplugging for a weekend or a vacation are long gone…” is hardly praiseworthy from a productivity point of view, even if it might explain the Facebook Home debacle. Ironically, it’s easy to imagine the takeaway for Sandberg is to work herself and her team even harder next time.
The True Relationship Between Long Hours and Career Growth
In my experience, it’s not talent but motivation – perhaps greed, ambition, or fear – that leads to working long hours. As both research and countless anecdotes suggest, long hours negatively impact an employee’s contribution to the business. Yet, in most organizations, long hours still result in career growth. In fact, in many companies, the willingness to work long hours, by itself, “signals” an employee’s fit and commitment and leads directly to career growth, without even attempting to quantify productivity and impact on results. We see the revised relationship below.
Notice that “talent” and “results” are no longer necessary for career growth; they’re hard to assess and measure, so we assume they’re proxied by hours worked (which, to be fair, is sometimes the case). This fits with my experience, where successful employees are often set apart not by skill or measurable results but by willingness to ask of themselves and others to “do whatever it takes.” They fit the current stereotype of a successful business leader, a stereotype that, regrettably, is reinforced by Sandberg’s well-intentioned but misguided advice.
Why Even “Productive” Work Often Adds Little Value
Most of us believe the work we perform is valuable, if for no other reason than to assure ourselves of our professional indispensability. But do we really add value, and if so, how much? The answers, it appears, are “not usually” and “not a lot.”
A 10-year study in the Harvard Business Review looked at both productivity and value, to better gauge both volume and quality of work. The results were eye-opening. Just 30% of work actually added value to the business. Put another way, 70% of all work accomplished was mere busywork – work for work’s sake.
Busywork often masquerades as work vital to an organization’s success. For example, last year I worked with a client looking to improve their website’s customer conversion rate and brand identity. A 6-month website overhaul project was launched, which, by my calculations, consumed 30,000 engineering and design hours in a nearly 30-week blitz of 60+ hour weeks. Tempers and burn out rates were high, mistakes and rework common. And the new website’s impact on conversion and brand identity vs. the old site? None. At the project debrief, all the talk was about how to cushion the impact of all that work – dinner catered, facilities to take showers, even “sleep” zones complete with couches and alarm clocks. The true takeaway, of course, is that efficient productivity is irrelevant if the work itself – vs. the status quo – adds no value.
If It’s Easy to Measure You’re Probably Measuring the Wrong Thing
They say that in business, you manage what you can measure. Well, actual value added by an employee is tough to measure, so organizations focus on something they feel must be related: hours worked. Superficial regard is given to the quality of those hours – whether the work is productive and truly adds value – because that’s inherently difficult to measure.
The present work-is-life mania is neither necessary nor inevitable; it’s something we’ve chosen, if only by our grudging acquiescence to it. Few of us want to live like this, any more than any one person wants to be part of a traffic jam – it’s something we collectively force one another to do. Taken within this context, role models like Sheryl Sandberg do a disservice by encouraging employees to build their lives around the context of their career, to monetize their lives by doing things which are easy to measure – hours worked – and de-prioritizing things that are hard to quantify and measure, but so much more important for most of us and those around us – life outside of work.
This post has its genesis in some questions a client recently asked me: How does our customer satisfaction compare to what you’ve seen? What can we do to increase it? How will that impact our growth? The relationship between satisfaction and growth is something I’ve been thinking about for a while, but the client’s questions helped clarify my focus.
The notion of being customer-centric plays a prominent role in the mission and growth strategies of nearly every organization. Yet quite often, customer satisfaction levels and growth rates appear unrelated. While many growing companies have satisfied customers, so do companies with slowing or negative growth. And while some companies with abysmal satisfaction scores may be stagnating, I’ve seen companies with mutinous customers growing despite themselves.
Is it true that a focus on the customer is a bedrock strategy to initiate, invigorate, and sustain growth? Or is something inherently appealing (“The customer is always right!”) and seemingly straightforward more complicated than it appears? Once we’ve disentangled assumptions from facts, is a strategy based on satisfying customers a realistic way for most companies to grow? Or is customer satisfaction a flawed measure which simply reflects customers’ rationalizations of their past decisions, but says little about their future intentions?
Perceived Relationship Between Customer Focus & Business Growth
The assumed relationship between a customer focus and an organization’s growth is seen below:
On the surface, these relationships conform to what most of us expect. Listening to and focusing on what customers say matters to them should increase their satisfaction. Higher satisfaction should in turn positively impact loyalty. And loyalty should have a direct impact on a company’s long-term growth.
But a view from the trenches with a variety of clients has led me to question these assumptions, starting with the belief that there’s a direct connection between customer focus and customer satisfaction.
Does A Customer Focus Increase Customer Satisfaction?
Anybody who has worked to improve customer satisfaction understands how hard and frustrating it can be. In their seminal book, “The Discipline of Market Leaders,” Treacy and Wiersema describe three “value disciplines” that companies can follow: Operations, Product, Customer Intimacy. They estimate that fewer than 10% of companies have value propositions, resources, and systems sufficient to “win” with customer intimacy. Yet nearly every company believes their passion for the customer provides them a unique competitive advantage.
There’s no question that different companies have very different levels of customer satisfaction. However, much of this difference is based not on the company itself (including their level of customer focus) but the industry they’re in and the customers they (and their competitors) tend to serve. To show this, I analyzed the ACSI benchmarks by industry and their component companies over time. To the right is a summary of those results, for a variety of industries.
The top number is the compound annual growth (CAGR) in satisfaction by industry, ranging from -0.2% to +0.3% – essentially zero, confirming that improving customer satisfaction is hard and often unrewarding work. Below that is the satisfaction average by industry for the past 17 years. Not surprisingly, TV Subscriptions (cable, satellite, etc.) are dead last at 63, followed closely by Airlines. The number at the bottom is the difference between the best company in an industry and the industry average. The largest difference occurs with Internet Retail, with Amazon (unsurprisingly) the standout at +7 vs. its average competitor. In the other industries, the company with the highest satisfaction exceeds its industry average by less than 5%.
What these and other data show is that most satisfaction rate differences are due to the industry, not the company. Improvements in customer satisfaction – at least in established industries – are very tough to come by, once industry averages are achieved. (A key distinction; satisfaction laggards can and should improve their satisfaction rates.) Even the “best” companies in an industry often have similar satisfaction levels relative to the rest of the industry, due to best-practice imitation and similar customer demands. Further proof of the weak relationship between satisfaction and growth – the widely divergent growth rates of firms within a given industry relative to their nearly equivalent satisfaction scores.
For the few companies that have sustained a meaningful advantage in customer satisfaction vs. their peers, the key is the close tie between their operating model and value proposition (more on this in my next post). Having a passion for the customer simply isn’t sufficient. So to answer the question that began this section: Can a customer-centric strategy lead to satisfaction levels above industry levels? Yes, but not often and usually not for long. Setting aside a passion for the customer, are most organizations capable of truly distinguishing themselves in this regard? Probably not.
Does Customer Satisfaction Lead to Loyalty?
For most companies of course, customer satisfaction isn’t the goal, but the means to an end – business growth. A big driver of that growth comes from existing customers, when satisfaction translates into loyalty – both repeat business and share of wallet. (I touch on word-of-mouth below.) Because in all industries, over time, the growth of new customers slows and then declines, the company that can keep more of its customers will be most successful in the long run.
As expected, research has shown that there is a direct relationship between customer satisfaction and certain aspects of loyalty – things like motivation, emotion, and trust. Of course, trust is great, but what about behavior, what customers actually do? Well there it’s a different story. Turns out there is little evidence that higher customer satisfaction by itself translates to profitable behavior (see here). Researcher Robert Peterson has found that in most customer satisfaction surveys, 85% of an organization’s customers claim to be “satisfied,” but still exhibit willingness to switch providers. And a Bain study found that 60% – 80% of customers who defected to a competitor said they were satisfied / very satisfied on the customer survey just prior to their defection!
The simple fact is that customer satisfaction levels have almost no impact on customer loyalty. Many factors that impact loyalty are outside the immediate control of the company. While a company can, to some extent, influence these factors – focus on different types of customers, increase switching barriers, provide a consistent experience – simply increasing satisfaction will have very little impact on loyalty. Can and should companies focus on increasing customer loyalty? Yes and absolutely. Will customer satisfaction be a reliable way to get there? Probably not.
Customer Satisfaction & Growth – Why Companies Get it Wrong
Recent research tries to tie customer satisfaction directly to growth. As one researcher put it: “Putting instincts aside, is there any proof that satisfying customers is worth the effort, and, in fact, pays off?” The answer is, not really. A broad set of research examined the relationship between employee and customer satisfaction and their impact on growth. The verdict? There’s no consistent relationship. In other words, if you’re focusing on customer satisfaction (or employee satisfaction, for that matter) as the driver of your business growth, you’re probably going to be disappointed.
They say that in business, you manage what you can measure. Well, customer value is very hard to understand, much less measure, so organizations focus on something that they feel must be related to value: customer satisfaction. Companies believe satisfaction is a close substitute for value delivered and thus a good leading indicator of the “health” of their business.
Companies assume that satisfied customers become better, more loyal customers, so companies try to increase satisfaction. But they’ve got it backwards. The real relationship is that better customers tend to be – but are not always – more satisfied. This is a subtle but important distinction. Customer satisfaction and loyalty don’t themselves add anything to customer value. They are byproducts of delivering value, not the drivers behind it. In fact, research shows that high loyalty can result from even low satisfaction situations, when there are exceptional levels of customer value (e.g., low prices). This helps explain the coexistence of low satisfaction and high loyalty. We can therefore revise the original relationship:
Customer value drives loyalty, which leads to business growth. While customer satisfaction doesn’t directly lead to growth, copious research shows that there is a clear relationship between customer satisfaction (especially very low and very high levels) and (positive and negative) network effects like reviews and word of mouth. Customer satisfaction, when combined with loyalty and network effects, can therefore play a contributing role in improving both retention and acquisition.
Companies should be skeptical that they truly – intimately – understand their customers. Instead, treat customers like an iceberg: What you see – their satisfaction level – is only a small part of what motivates them. While a select few companies are able to peer beneath the water because of their distinct competencies and operating model, for most companies, mooring to an iceberg, ignorant of what’s below the surface, can lead to disaster.
To answer the questions posed by my client, I’d say this. Focus on value, not satisfaction. Satisfaction is a consequence, not a driver. Value tells a company what to do (gives it direction), while satisfaction tells the company how it is doing (gives a report card). Doing the wrong things the right way is a great approach if your goal is highly satisfied, former customers.
The past post reviewed why getting strategy right is so important in generating sustainable growth. For the small number of firms that look at strategy as competitive positioning, the long-term growth rates exceed more tactical or planning approaches to growth management. This post will review why, despite clear evidence of the benefits of strategy, so little of what passes today for strategy is actually very good. It will also explain why the organizations most focused on growth are the ones most resistant to strategy.
Why Is Good Strategy So Rare?
While almost all organizations say they have strategies, many don’t. I used to think this was because organizations had limited or faulty data, or conducted poor analysis of the industry and competitors. And to some extent, this remains true – failure to understand the internal and external environments limits growth options. But the more I have worked in this field, the more I’ve come to appreciate the more subtle and pervasive obstacles to clear strategic thinking, and how challenging it is for companies to develop and maintain their strategies over time. Some of these inhibitors are described below.
* Operational focus. There’s no question that operational excellence – covering things like quality, productivity, and speed – can have a significant and immediate impact on an organization’s performance. What makes this approach so popular is that it includes a series of best practices that are straightforward to replicate. Michael Porter uses the concept of a Productivity Frontier to describe operational excellence; I’ve added some modifications below to show the dynamic nature of industry operational focus.
There are two dimensions – customer value and price position. Companies choose which operations to optimize – often based on perceived core competencies – providing operational focus. As organizations approach operational optimization, competitive conflict intensifies, often resulting in mutually destructive competition where the customer wins at the expense of industry profit. While productivity frontiers can shift out (via new technologies, for example), the operational focus sparked by Japan in the 1980s has decreased the distance between the average firm and their industry’s efficiency frontier. So while there’s no doubt that operational excellence is a necessary condition for an organization to succeed, it is a mistake to count on past operational excellence to sustain tomorrow’s growth imperatives.
* Resources vs. resourcefulness. Good strategy works by focusing energy and resources on one, or a very few, pivotal objectives whose accomplishment will lead to a cascade of favorable outcomes. Organizations are often evaluated in terms of resources, when the proper perspective is resourcefulness. Recently I met with an executive team to discuss their growth strategy. They believed that an additional round of funding would be needed to ‘size-up’ the company in terms of headcount and capabilities, to be ready to seize new opportunities if they arose. The rationale was, “If only we had more resources, we could be more strategic.” Yet, it was apparent to me that the real issue wasn’t a lack of resources but a lack of focus, an inability to separate the good ideas from the bad, and too little thinking about how to leverage existing resources (versus the capacity to outlast rivals). Showering these executives with more resources without a fundamental improvement in their ability to leverage resources is wasteful; they’ll be back, asking for more.
* Missing skill sets. In most organizations, the executive team is responsible for laying out the strategic course and ensuring proper execution. While excelling at the latter, most executives struggle with being strategic. The skill sets that get managers to senior levels – problem solving, political acumen, drive, resource planning and allocation, department management – are largely irrelevant (or even counterproductive) to creating effective strategy. Strategy involves creativity, something that is hard to quantify and measure, and thus not focused on by most executives. Compounding matters, executive separation from the day-to-day details of the business impacts the quality of their strategic thought. Effective strategists immerse themselves in the daily detail while being able to abstract the strategic messages from it. They connect acting to thinking which in turn connects implementation to formulation. They understand that we think in order to act, but we also act in order to think. When there’s a disconnect between these two, the result is fuzzy thinking, which often leads to bad strategy.
* Failure to balance long- and short-term. Many organizations struggle to reconcile and mutually support both short- and long-term goals. Most companies allocate resources using tactical capital-budgeting mechanisms that stress easy- to quantify measures like cash flow or economic value add. This means that strategic opportunities that defy easy or accurate measurement – longer-term projects, cross-departmental initiatives, brand new initiatives – often times won’t pass the review process and are deferred until next year, when additional analysis may justify them.
* The evolution of capital markets. As the capital (and secondary) markets have evolved, they’ve become increasingly toxic for strategy. The single-minded pursuit of shareholder value, measured over the short-term, has been enormously destructive for strategy and long-term value creation (see my post here). Managers are chasing the wrong goal, spurred on in part by industry experts and analysts who push companies towards “competition to be the best,” where companies are exhorted to look like the current market favorite. Good strategy does the opposite, creating tangible differences between an organization and its competitors. While different is hard, and risky, it’s the only way to sustain long-term growth.
* False consensus. People consistently overestimate the extent to which others share their views and beliefs, through things like confirmation bias, selective recall, and group-think. I’ve been part of executive discussions where the CEO might say, “The executive team is 100% behind our strategy,” then have 1×1 conversations with key executives where it’s clear substantial differences of opinion remain unresolved. Or hear, “I’ve only heard great things from our dealers and customers,” then conduct research that finds significant dissatisfaction. Failure to confront and address disagreements honestly can lead to missing key strategic threats/opportunities or cause organizations to persist with doomed strategies.
So Why is Good Strategy Rare?
Strategy involves focus and, therefore, choice. And choice means setting aside some goals in favor of others. Many organizations are unable to make these choices, coming up with lists of things to do based on what a variety of stakeholders would like to see accomplished. I’ve seen lists of 100+ “strategies” cover every available surface in conference rooms. Calling these strategies doesn’t change the fact that they’re really just things to do. Typically by the end of the retreat, the daunting nature of so many “strategies” is acknowledged by adding the label “long-term” to the list.
The necessity of choice is what causes organizations most focused on growth to be the most resistant to strategy. Trade-offs and limits give the appearance of constraining, not sustaining growth. A conscious decision to limit competitive scope – be it through geographic, product line, customer, or other factors – may appear to place limits on an organization’s growth ambitions. And indeed it may, in the short term. But the alternative, trying to be everything to everybody, nearly always results in an erosion of competitive advantage with target customers and creates confusion and undermines organizational motivation and focus.
The widespread lack of strategy, and corresponding heavy operational focus, is driving competitive convergence, as benchmarking and imitation leaves competitors increasingly homogenous and industries racked by wars of attrition. Industry consolidation continues to accelerate, as organizations, driven by performance pressures but lacking strategic vision, have no better ideas than to buy up rivals. The competitors left standing are often those that outlasted the others, not companies with real advantages. In which case, a strategy of finding undiscriminating investors may not be such a bad one after all.
We see today organizations of all sizes attempting to keep their feet on ground that is slipping away from under them. In many of these organizations, the tug of war between strategy and tactics is increasingly shifted towards the tactical, towards “doing” and away from “thinking.” It’s easy to see why. Tactics are straightforward to execute and provide instant gratification, whereas the creation and outcome of strategy is uncertain and can take years to make a significant impact, if ever. For many – both organizations and individuals – the seemingly urgent drives out the important; the future goes unexplored; and the capacity to act, divorced from the capacity to think and imagine, becomes the measure of leadership.
The Key Question Confronting Every Organization
Most organizations will confront important questions: How can we attract more new customers? Why are our retention rates decreasing? What impact can our brand have on short-term and long-term performance? What are our customer segments, and on which should we focus? Are there product/service changes that can target new buyer segments? Should we grow via acquisition or international expansion? How should we be thinking about innovation? What are our competitors planning? All of these questions ladder up to a broader question confronting all organizations: How do we ensure an acceptable level of sustainable growth?
Achieving sustainable growth is not possible without paying heed to the twin cornerstones of growth strategy and growth competence. Companies that pay inadequate attention to one aspect or the other will struggle in their efforts to establish practices of sustainable growth (though short-term gains may be realized). In many organizations, the sacrifice of the long-term (strategy) on the altar of the short-term (benchmarking and copy the leader) is having a profound impact on long-term growth.
Today’s post will focus on the state of strategy in many organizations today. Subsequent posts will cover why strategy is so misunderstood, ways to think about strategy in a metrics-driven organization, and how best to ensure effective strategic implementation.
The State of Strategy in Organizations Today
I’ve had the opportunity to work with a variety of organizations – from Fortune 500’s to start-ups. Despite many differences, one thing has consistently stood out: An inconsistent or nonexistent approach to strategy and the corresponding impact on the organization’s culture and long-term prospects for growth. An honest assessment would conclude: It’s a mess out there.
In many organizations, there is a nearly exclusive focus on operational execution – these are the tacticians. This approach largely ignores the external environment and often includes only a superficial understanding of internal dynamics and culture. Tacticians believe there are key levers and best practices that drive success in almost any environment, including areas like human capital, customer management, supply chain management, and marketing and sales. We’ll see below that while operational excellence does impact growth, it can’t sustain it.
Other organizations use annual retreats or off-sites to strategize for the upcoming year – these are the planners. This approach focuses on the planning cycle, where financial goals are enumerated, gaps based on current trends are measured, and a series of initiatives are articulated to help close the gap between trends and forecast. This approach is largely a tactical planning exercise punctuated with the occasional burst of heroic (sometimes ill-conceived) “strategic” investments. We’ll see below that this approach rarely makes a significant impact on growth.
Another group uses a set of analytical techniques to identify internal strengths and weaknesses and external opportunities and threats – these are the positioners. Mapping internal capabilities against external realities, it is the strategist’s job to ‘position’ the organization within its environment in a way that makes its position unassailable from current or future competitors. Based heavily on the tradition of military strategy, the ultimate goal is to amass resources with which to consolidate current positions while expanding beachheads into new areas.
Several years ago, strategy boutique BCG presented results from a longitudinal research study looking at growth rates based on different organization’s approach to strategy. Below are the 3 approaches (plus industry growth) and their corresponding growth rates:
Whether by chance or design, organizations that find themselves in a growing or transforming industry can maintain growth simply by treading water in a rising tide. Organizations that don’t recognize this boost can be caught unawares when growth suddenly slows, however. With the tactical approach, we see a very quick and significant boost to growth when best practices are instilled, but this boost can’t sustain growth long term. The planning approach has little impact. Within weeks, as immediate challenges need to be addressed, the agreed upon strategies are shelved until preparation for the next offsite begins. Finally, the positioning approach yields the biggest and longest incremental growth rates, but also requires the most creativity and patience, two traits in short supply in today’s tactics-driven organizations.
In my next post, I’ll explore why strategy is so misunderstood in many organizations today.
Over the last three decades, the dominant mode of corporate economic thinking has been shareholder value. A reaction to the corporate excesses and wastes of the 70’s and early ’80’s (see the gripping Barbarians at the Gate), this straightforward and seemingly commonsensical theory holds that the primary purpose of a corporation is to maximize the return received by its ‘owners’ – shareholders.
The general appeal of shareholder value is its simplicity: Shareholder wealth is measured by a company’s stock price; through the collective wisdom of the market, the stock price captures a company’s short-term performance and long-term prospects; management is aligned with shareholders through the use of stock-based incentives; and the free market transforms corporate interest into society’s best interests. On the surface, an entirely reasonable and logical approach, with the exception that every assumption is in fact false.
In Predictably Irrational, Duke professor Dan Ariely demonstrates that short-term thinking often dominates long-term thinking, even when the latter is more rationale and leaves us better off. From eating a doughnut to buying an unaffordable car, the benefits of the short-term are clear, while the future costs – health issues, a deferred retirement – are ambiguous, hard to prove, and accumulate over time. The conclusion is that humans are not the fully informed, highly rational beings assumed by market theory. Confounded by contradictions, befuddled and bewildered, the only thing predictable about us is our irrationality. To use Freud’s terminology, our id (the desire for immediate pleasure) dominates the superego (our conscience), despite our ego’s (rational self) best efforts.
We should be skeptical, therefore, of any economic plan that assumes individuals can properly balance the short and long term. Indeed, the father of classical economics, Alfred Marshall, wrote in 1890 that individuals “act like children who pick the plums out of their pudding to eat them at once.” Well-known economist, AC Pigou, opined in 1920 that, “Our telescopic faculty is defective.” No matter how hard we squint, the future won’t come into focus. And so we focus on what we can see, the short term.
By failing to incorporate these fundamental facts of human nature, shareholder value has led to a seemingly endless string of catastrophes. From the frenzy of the housing bubble to the encouragement of highly dubious (and continuing) wagers
in the financial industry, from extreme inequality of wealth, to BP’s Deepwater Horizon catastrophe, the singular focus on short-term shareholder value has had devastating consequences, not only for society but for shareholders themselves. As Lynn Stout persuasively argues in The Myth of Shareholder Value:
In the quest to “unlock shareholder value,” management sell key assets, fire loyal employees, and cut back on customer support; drain cash reserves to pay large dividends and repurchase company shares, leveraging firms until they teeter on the brink of insolvency.
But if shareholder value is based on faulty assumptions (see here and here for powerful critiques and prescriptions), and has wrought such devastation, if even “neutron” Jack Welch now calls it “the dumbest idea in the world,” how has it lasted 30 years? In Hans Christian Andersen’s The Emperor’s New Clothes, two charlatans create a suit of clothes so fine that they are invisible to anyone unworthy. Though the emperor’s subjects think him mad, they all pretend to appreciate his new clothes; to claim otherwise would announce their unworthiness. When charlatans set the rules, it’s easier to prolong a farce.
So if the despotic reign of shareholder value is ending, what will take its place? Some argue that focusing on the customer is the place to start (see here, here, here). Given what we know about individuals, can we expect them – in their roles as customers – to act in a collectively enlightened, long-term manner? I have my doubts – for instance, a customer demand for the lowest prices has led in part to many objectionable practices by Wal-Mart, from outsourcing to bribery to below-subsistence wages. And customers’ insatiable demand for fast, affordable, and tasty food has put a lot of dollars in McDonalds’ pockets while contributing to billions of dollars in medical expenses.
However, I think that individuals are the best focus when they are more fully informed and better organized. What if we had an impartial scorecard to evaluate companies based on how they treat key constituencies – not just shareholders, but customers, employees, their communities, the environment? And what if there was a way for us to organize ourselves, to express our satisfaction or dissatisfaction to companies in a way that mattered to them? It’s unlikely that we as individuals can persuade companies to pursue non-profit motives. However, it is in our power to control their profits, and hence, their behavior, by deciding whether to patronize them. All we need is knowledge, a way to combine our influence, and the will to potentially sacrifice our short-term interest (convenience, price, etc.) for a better future for us and our children. Groupon may fail, but it has unleashed a powerful idea, providing a blueprint for regaining our economic and social equilibrium.
“What’s the use of running if you’re on the wrong road?” (German proverb)
“A man of thought who won’t act is ineffective; a man of action who won’t think is dangerous.” (Nixon)
Perhaps no business concept is as debated and often misunderstood as strategy. Professionals often hear the advice, “Be strategic,” but few understand what exactly that means and how to go about it. There’s a vague sense that they should be “doing” less and “thinking” more, that their focus should shift from the trenches to the battlefield. And in some ways this is true; strategy needs to encompass a broad perspective that takes many pieces and players into account. However, many would-be strategists fail when they don’t base their strategies on a solid foundation of facts.
There are several critical components to developing effective, even game-changing strategies. The first is access to unfiltered data, raw information. This can take many forms: proprietary databases, website analytics, industry publications, customer surveys, and in-the-field interviews. Just having data isn’t enough, though. You need to know the right questions to ask, which patterns to look for and how to interpret them. The analysis is what generates insight, and it is from insight that potential strategies are formed. Strategy, then, is developed from an intimate and analytical knowledge of a company and its ecosystem.
In most organizations, the generals setting strategy have little interaction with the troops, the ones with boots on the ground. There’s a dividing line that separates the functions. At most, strategists get reports that have been filtered and scrubbed (what analysts pejoratively refer to as “idiot lights“), effectively neutered and incapable of generating real insight.
Those with access to raw information often don’t have the experience and overarching visibility to ask the right questions and generate insight. Conversely, the executives – the ones counted on to lead the company – do have the experience and visibility, but without access to the data, they don’t know which questions to ask, and so are left with answers to questions that may or may not be the right ones. It’s like asking a general to storm a hill, or a grunt to manage the battlefield. Neither is equipped for the task.
There’s a recent, very public and very expensive example of how failure to dig into the details by a CEO led to a strategy which, in a matter of weeks, bled billions of dollars from JP Morgan’s coffers. As recounted in The Wall Street Journal:
On April 30, associates who were gathered in a conference room handed Mr. Dimon summaries and analyses of the losses. But there were no details about the trades themselves. “I want to see the positions!” he barked, throwing down the papers, according to the attendees. “Now! I want to see everything!” When Mr. Dimon saw the numbers, these people say, he couldn’t breathe.
Dimon’s failure wasn’t that he didn’t have a system in place to analyze the data, or an executive team setting strategy. It’s that he and his strategists didn’t insist on raw, unfiltered and unsummarized data. His failure was not getting into the detail of what his team was doing, not lending his significant experience and expertise. If he had, it’s conceivable that JP Morgan would be billions of dollars richer than it is today. As Michael Schrage argues, “There’s a reason why great chefs visit the farms and markets that source their restaurants: The raw ingredients are critical to success.”
Of course, leaders can’t spend all of their time in the detail. In What Got You Here Won’t Get You There, Goldsmith and Reiter make this point explicitly. Indeed, people get promoted because of their ability to execute operationally, but are then implicitly admonished to cross the divide separating thinking from doing, to become visionary leaders. Yet in Great By Choice, Jim Collins finds that successful leaders aren’t especially bold, visionary, or innovative. Instead, “They observed what worked (data), figured out why it worked (analysis), and built upon proven foundations (strategy).” A somewhat boring approach, perhaps, but effective.
Strategy isn’t easy, but it’s not rocket science either. You have to understand your market, your customers, your direct and indirect competitors, and the intricacies of the systems in which you operate. You must use your analytical skills to ferret out key insights. And these insights must then be tied to strategies.
For a broader perspective on the strategy journey from beginning to end, see this recent McKinsey article.
Thoughts/questions? Ping me on Twitter (@JeremyArnone)
Historically, companies have driven earnings growth via robust demand, first domestically and then internationally. As worldwide economic growth has decelerated the past 10 years, companies have increasingly relied on cost-cutting programs to buoy earnings. However, with much of the easiest cost cutting already occurred (we can hope), many companies are unsure where next to find an earnings boost.
When it comes to ways to drive earnings growth, pricing always takes a back seat to higher volume (demand) and reducing variable costs (such as me or you). This despite the fact that a 1% increase in price leads to an average 8% increase in operating profit, 50% higher than a similar decrease in cost, and 300% higher than a 1% increase in volume.
On the other hand, a decrease in price has the exact same effect on earnings. For example, a 5% fall in price would require a nearly 20% increase in volume to make up the decrease in earnings. Whether because of “market conditions,” a Sales team “closing the sale,” or an attempt to spur volume, it’s almost impossible to increase demand sufficiently to justify significant price cuts.
So why does pricing not get the respect (and fear) it deserves? I think there are several reasons. Because most companies don’t understand the power of pricing, it’s not prioritized. In addition, pricing is hard; few companies have the knowledge and experience to tackle it effectively. Plus, many companies have a “gut feel” that raising prices is bad for their long-term health, and isn’t a customer-friendly approach. And lastly, driving growth via pricing just isn’t as sexy as entering new markets and attracting new customers. “Board, our strategy this year is to raise our prices by 3%. Questions?”
To see how this might work in action, I’d like to share the growth challenges confronted by a large B2C merchant. The data is disguised to ensure confidentiality.
The company is looking to improve customer acquisition. Management has preliminary discussions about lowering prices, increasing shipping discounts, and spending more on marketing. With the main selling season just 6 months away, the company needs to make a decision quickly. What should it do?
We started by running a series of pricing tests, to understand the impact on share, sales, and margin of different price points. Here’s what we found:
This analysis showed that, contrary to the team’s assumptions, the price which would drive the greatest sales was not the same price that would drive the highest share. In fact, the price difference was almost 20%. And the margin-maximizing price point was nearly 40% higher!
This analysis also showed a major problem. While the company’s advertised price was at the high end of the range, their margin performance was closer to the low price. Why? Because while the company was using the higher price in its marketing and sales collateral, it was offering a series of promotions and discounts to close the sale. In other words, they were getting the (lower) share of a high price and the (lower) margin of a low price, the worst possible combination.
Our recommendation was to reverse this relationship, to advertise the lower price and then work to increase the price during the conversion process. This would increase the volume at the top of the conversion funnel and, if managed well, increase the final price paid without a significant impact on conversion.
We also recommended a segmentation strategy which better identified prospect and customer segments. We saw very little variation in the price paid across the customer file, which can indicate an inefficient matching of needs and willingness to pay.
Finally, we suggested a more consistent use of value-add offerings. There were a variety of internal and external products and services which could complement the existing product to improve conversion, net price, and customer satisfaction.
Through the use of web analytics and the customer database, a customer segmentation project was initiated. Based on existing behavior and purchase histories (standard RFM augmented with clickstream, demographic, and survey data), a number of high-level segments were created. The use of discounts on the site and with the Sales team was reduced, while advertised prices were lowered closer to the share-maximizing level. Key parts of the website – with a focus on the order process – were changed to improve the check out process, reducing the number of steps required to complete an order while also adding in upsell and cross-sell opportunities where appropriate. This had a significant impact on the net price paid, which we see below, and yielded significant increases in market share, sales, and earnings.
In the overall marketing mix, price is the most important item that can affect a company’s profitability. How to set prices and measure their impact on a company’s business model, however, is less clear. Too many times, the focus of pricing is related to short-term competition or internal cost structure. To develop an effective pricing strategy, it’s important to integrate meaningful customer input based on company and competitive offerings, in order to answer the following types of questions.
- Is our goal market share, revenue, or profitability, and do we know the optimal price for each?
- What is the value we provide to customers, and does our pricing reflect this value?
- What do we know about our customers and can they be segmented based on willingness to pay?
- How do we leverage non-product components to increase the value (and price) of the product?
Management must create an environment that encourages marketing, product, and finance to develop the necessary inputs and to work together to develop the optimum strategies. This is no easy task, but the benefits of a comprehensive pricing strategy compared to on-going reactive pricing can be tremendous.
The analytics revolution sweeping across many organizations has yet to be fully incorporated into Sales organizations. Despite recent progress, having tools like Salesforce.com and Google Analytics is simply insufficient. Far too few organizations are combining proven Sales approaches with a true analytical mindset to ask and answer the right questions.
We have seen 3 waves of analytics in Sales: the late 1980s, the late 90’s with Siebel Systems, and more recently, with Salesforce.com and similar tools. Surveys show widespread dissatisfaction with CRM implementations, and Big Data tools like Salesforce.com are not well utilized or even understood. Despite this, executives are encouraged to invest just a little bit more – Big Data goodness is just around the corner.
Clearly there’s a major disconnect between Big Data promises and the reality in most Sales organizations today. Before investing more resources, senior executives should make sure they’re on the right path, by taking the following steps:
- Use segmentation to identify customer traits correlated with their KPIs.
- Prioritize segments based on the incremental impact from sales.
- Tailor KPIs (and salespeople’s incentives) for each segment.
To see how this might work in action, let’s explore a recent engagement where a leading enterprise confronted this situation. The data is disguised to protect confidentiality.
The company has seen impressive growth based on a model of marketing driving leads and sales turning leads into customers. With growth slowing, it is considering significant investments in marketing and sales, but is concerned about the impact on profitability. What should it do?
We started with a deep dive into the analytics, correlating 3 primary KPIs (conversion, average revenue per user (ARPU), and LTV) with 17 variables contained at the user level within Salesforce.com and proprietary databases. We used this segmentation to calculate expected values on each KPI based on the type of user. A sample of these values – conversion rates – is listed below.
While interesting, this analysis begged the question of where the sales team should focus. To find out, we broke each segment into a control and a test group. The control group received the standard outbound email and phone contacts from the sales team. The test group received no outbound contacts from the sales team – essentially Sales was turned off. The difference in performance is listed below.
There were several interesting insights. The first was an eye opener: The sales team’s impact on conversion wasn’t 20% but only 5%; surprisingly, 15% of customers in the test group converted without contact from Sales. About half the leads were from Broadcast media, very unqualified, but still took 60% of the sales team’s time. Leads from online marketing channels had a very high conversion rate when contacted by sales, but saw a more than 50% decrease when not contacted. And the most active leads – using the product most frequently – actually converted worse when they were contacted by the sales team!
The last step was to move beyond conversion as the sole KPI, focusing on LTV for each segment. For segments with very low conversion, we moved further up the funnel, testing micro-conversion events (such as a whitepaper download or attending a webinar) and allowing users, with minimal direct guidance, to move down the funnel at their own pace. For segments with already high conversion, we focused lower in the funnel, exploring ways to increase ARPU (via upsells and cross-sells) or decrease future churn (via onboarding).
A scoring model was automated within Salesforce.com, with a recommended content and contact strategy put in place for each segment. The least qualified leads were assigned to an auto-responder campaign, and outbound contact from the sales team was significantly reduced. This freed up time for the team to focus on other opportunities, including retention, ARPU, and outbound prospecting. It also saved more than $1M by demonstrating an expanded sales team was unnecessary. Meanwhile, marketing shifted their mix from broadcast to online marketing channels, increasing ROAS by 120%.
Many companies are reluctant to tinker with their approach to sales – even minor inefficiencies can jeopardize revenue. Plus, incorporating new ways of thinking requires coordination across the entire organization, from sales, marketing, analytics, support, and finance – and the consistent support and direction from the top. Much easier said than done.
However, substituting analytics for gut instinct and basic CRM reporting helps take the guessing game out of important investment decisions. Using test-and-control techniques popularized in the direct response world can show the true impact of the sales team and better prioritize their focus and objectives. Executives need to understand what’s going on within the sales organization, starting with some basic questions around analytic competencies and capabilities. Rather than invest in systems, tools, and training, many companies would be better off hiring a couple of very inquisitive, analytical problem solvers, and provide them cover to ask all sorts of interesting and (potentially) uncomfortable questions. The end results will very likely be faster, cheaper, and better than any outsourced or automated solution.
It’s this last metric – Churn – that is almost universally considered the most important metric to improve (see David Skok’s excellent analysis here). To demonstrate that churn is, in some situations, perhaps not the right place to start when looking to improve business results, I’ll review the following:
- The LTV associated with improving each metric.
- The impact of time on when benefits are realized.
- The relative improvements you can expect on each metric.
- Other factors to consider.
To make the comparison easier, I’m going to start with David’s churn number, while estimating ARPU and conversion. For us, that means churn at 5%, ARPU at $50, and conversion at 15%.
Let’s start off by assuming we can improve each KPI by the 50% that David uses for churn improvements (from 5% to 2.5%). This means ARPU increases from $50 to $75, while conversion goes from 15% to 22.5%. If we look at the LTV impact of each change, we see the following:
So far so good. On an individual basis, reducing churn by 50% has the same impact as improving both ARPU and conversion by 50%. But a lifetime is a long time to wait, though. In this example, let’s plot the impact of each metric on a monthly basis.
While the overall impact of churn is the largest, you have to be patient. Based on these assumptions, you have to wait between 3 and 4 years before the impact from churn exceeds the impact from increasing ARPU and Conversion. For instance, after two years, you’d have received a 250% higher return from ARPU/Conversion than you would from Churn.
Up until now, we’ve assumed that we can impact each KPI by a given amount. We should relax this assumption for two reasons:
- Every company will be performing differently on a relative basis, influencing which KPI represents their lowest-hanging fruit.
- KPIs earlier in the customer life-cycle tend to be easier to impact. In general, this means that conversion > ARPU > churn.
So let’s see what happens when we adjust each KPI, taking into account the relative ease with which we can do this (hypothetically). Let’s improve conversion by 40%, ARPU by 30%, and churn by 20%.
Every company must establish baselines for their KPIs in order to understand the likely impact of optimization programs. It may be realistic to improve churn even more than ARPU and conversion; it just depends on your (relative) starting point. For relatively well-managed companies, reducing churn (or improving retention) is less simple (and more expensive) than generally understood. I’ve seen great companies hammer away at churn/retention numbers for months, even years, without making a dent, once the easy improvements were made.
There are additional factors that should be understood before embarking on a churn/retention improvement pogrom. Here are just a few:
- Significant costs. These might be direct costs – salespeople, customer support, your product team. They can also be opportunity costs – for example, every dollar spent on reducing churn is a dollar that could have been spent on the immediate benefits of customer acquisition.
- Number of customers. I’ve seen fixed cost components of churn/retention programs average 30%. As the size of the customer base increases, these costs are spread over a greater number of customers, improving unit economics.
- Acquisition economics. Your willingness to invest in churn/retention improvements depends in part on your costs to acquire new customers. Generally speaking, as your acquisition costs increase (and/or as market growth slows), retaining existing customers becomes more important.
- Stay/go impact. How much impact do you have on the customer’s stay/go decision? If you have a relatively low impact on that decision (e.g., if your customers are small and often go out of business), churn/retention strategies may not work for you – focus instead on improving your other KPIs.
- Lag factors. How long it takes to see significant impact on your metrics is an important consideration. Conversion testing can yield results in days/weeks; ARPU generally takes months. Churn/retention strategies can take years to get right / reach full impact. Make sure you build these ramp up times into your decision process.
This analysis attempts to show that the usual recommendation of focusing on churn as the most important KPI is overly broad. A combination of general and company-specific factors need to be accounted for prior to deciding upon which metrics to focus.
This analysis assumes that a company focuses on one KPI at a time. While it’s possible to focus on multiple KPIs concurrently, in my experience this typically leads to sub-optimization for all KPIs, especially for smaller companies with less experience and more limited room for error.
For a company unsure where to start, I’d suggest the following steps:
- Accurately measure your current and historical KPIs.
- Compare your KPIs to industry averages, establishing a baseline.
- Estimate direct & opportunity costs associated with KPI optimization programs.
- Model out the expected impact from each program and prioritize accordingly.