The Secret

I came across a recent New York Times “Digest” article with a title that, on its own, pinpoints the big clue to competitive advantage for any company. Ready for the secret? Here’s the title:

Detroit’s Problem: Making Cars People Want

There it is, folks. Short and sweet. You executives, MBA’s, investment bankers, consultants, and professors who make the art of business so darn complicated, listen up. At the end of the day, after one plows though all the spreadsheets, algorithms, databases, reports, and committee meetings, a company’s success is based on its ability to make and sell stuff that customers want to buy. Period. End of story.

GM and Ford have plenty of problems vis-à-vis gas prices, pension liabilities, health care costs, labor unions, and interest rates. But to quote the article, the basic reason that those companies are in trouble is that “not enough people like their cars.” If that’s a no-brainer, here’s another one: From customers’ perspectives, Detroit’s products don’t seem to get the formula right when compared to competitors like Toyota, Hyundai and BMW. And according to many observers, that formula includes factors like quality, reliability, style, and excitement.

I have just done you a great favor. I have saved you oodles of money that you would have spent for consultancies, surveys and training materials. Whatever it is that your company does, it all boils down to “making cars people want”. The problem is this: the larger the company, the higher the percentage of people on the payroll whose jobs have little to do with making products that people want. Too many people are spending their days earnestly writing reports that will gather cobwebs and attending endless meetings that numb the mind. But they’re not focusing their attention and imagination on helping the company make stuff that customers want to buy. That’s the reason that companies become bureaucratic, slow, and uninspired, and why quality, reliability, style and excitement plummet. I am certain that G.M. and Ford suffer from this malady. The question is: Does your company suffer too?

Retirement Package Masquerading as Merger

Let me see if I have this right. A near-bankrupt America West--instead of cleaning up its bloated cost structure and dysfunctional business model—is going to spend precious capital (up to $1 billion, by some reports) on acquiring a bankrupt U.S. Air. And we’re supposed to expect this acquisition to result in a fleet, strong new company which provides fresh imaginative value for customers and investors???? Am I living in the wrong planet? Who’s been smoking what? This is truly a case of two dinosaurs mating with the delusional hope of creating a gazelle.

The idea, on paper at least, is to create a national, low-fare airline. Right. If I were a low-fare competitor, I’d be thrilled with this deal. On the surface, the combined America West/US Air company might be able to reduce a few redundancies, scrape off a few cost-barnacles, and operate in a few more cities. But the new company will still face massive debt, huge integration issues, tight federal oversight, horrific labor management contracts, well-documented cost inefficiencies, a debilitating hub-and-spoke legacy, and a risk-averse bureaucratic culture. Really now, how likely is this company to effectively compete with the likes of rabidly lean, entreprenurial, price-slashing, and profitable Jet Blue (which, by the way, has earned repeated accolades for customer service)? Southwest Air is already eating US Air’s lunch at Baltimore-Washington and is steadily chomping away at US Air’s traditional stranglehold in Philadelphia. Against these and other trim, agile, hungry, low-fare "roadrunners", how in the world is a US Air/America West "wile e. coyote" supposed to attract a bevy of new customers with profitable growth?

I was so baffled by these questions that I turned to a successful investor for deep wisdom. He laughed at my quandary. “It’s obvious why this deal is being done. It’s an executive retirement package. The top managers of both companies want to throw in the towel. They don’t know how to fix their businesses, but a merger tells their shareholders that they’re doing something. More importantly, it gives them the opportunity to set up the conditions for a nice, fat compensation payout when they ride off into the sunset.” Well, if that’s the case at least there’s something innovative coming out of this deal.

I’m a fan of sound sensible acquisitions, but this one is so bizarre that my colleague’s explanation is as good as any I’ve heard. What do you think?

For Customers, Soft Often Trumps Hard

I just got back from a business trip. This one, my wife and kids came too, because it was a nice place for a holiday. (Stay with me on this, because there’s a great moral to the story).

So we check in, and the gal behinds the desk asks for our kids’ names. “Why?” asks my wife skeptically. We soon find out. After we unpack, there’s a knock on the door. Here come the goodies. My kids like to think of themselves as cool sophisticated 8 and 10 year olds, but they are thrilled to receive small bath robes with a stuffed animal monkeys wrapped around them, along with milk and cookies that have their names sprinkled on them, as well as little bath sponges made of the letters of their names. (The bath robes were temporary, everything else was a keeper).

That’s how it went during the few days we were in the hotel. Little things, like popcorn and root beer waiting for them after we return from a hot afternoon at a theme park. Or, when I’m talking to room service on the phone, trying unsuccessfully to whet my 8 year old’s interest in a meal, and the lady on the other end of the line says kindly: “Let me talk to him.” They engage in a long conversation which culminates in an order.

The hotel didn’t ignore us adults. My wife appreciated the fact that after a jog the outside bellman would greet her with a towlette and small bottle of water. I appreciated the fact that after the hotel’s business office did a minor screw-up on some materials I prepared for my client, the entire front desk personnel roster seemed to go into immediate overdrive to solve the problem, and later I received a small bowl of fruit in my room, along with a long, handwritten letter of apology.

So what’s the moral? Sure, we’ll remember the “hard” stuff, the big-ticket tangibles, like the location of the hotel, the make-up of the property itself, the restaurants, the comfort of the meeting rooms and the fitness center, the attractions in the “children’s center”. All very important.

But you know what? A lot of upscale hotels offer pretty much the same tangibles, the same amenities. The key question for hotels (and for your business) is: how do we differentiate ourselves? How do we get customers to remember us, and come back?

All I can say is that our family will remember the “soft” stuff even more than the hard stuff. We'll remember the dinky little toys, the little gestures of affection, the authentic reaction to a foul-up. I wish more vendors would understand that the soft stuff is a lot cheaper than the hard stuff, yet for customers, it usually has a bigger impact. It reflects intangible factors like care, concern, attention, respect, even a kind of love. This hotel was smart enough to train its employees to deliver steady buckets of soft stuff to every guest, regardless of their age.

A cynic might say that the hotel is doing all this to justify its "non-cheap" room rate. But I prefer to flip the equation around: It’s because the hotel is doing all this that it can charge a premium rate, and differentiate itself from competitors at the same time. Which means that if you, in your business, start systematically providing your customers with heaps of cheap, soft stuff that matters to them, you too can charge a higher price and build customer loyalty at the same time.

I don’t want to be overly simplistic; every business has its own idiosyncracies (see, for example, my recent April 11 blog). But as a general rule, “soft” is a very big deal if applied systematically and authentically. As customers, we’re suckers for this stuff. And the reason “substantial soft” so often generates a substantial return on investment is because we customers rarely experience it.

The Toughest Management Job?

I am convinced that running a hospital must be one of the most frustrating management jobs on earth. That’s because the ordinary laws of supply and demand often vanish, and hospital managers then operate in a bizarre environment where “customers” expect state-of-the-art service, they expect it now, and they expect it for free. After all, customers themselves rarely pay for their health care services. A third party, like an insurer, does—which totally distorts the economics. But if that’s bad, just wait; it gets weirder.

Here’s what hospital administrators have to deal with. A gangbanger is brought into the emergency room at 2 a.m. suffering from multiple gunshot wounds. A half hour later a woman who doesn’t speak English and is in the U.S. illegally is brought in ready to deliver a baby. What do these two individuals have in common? They both know that they’ll never pay the hospital a dime, and the hospital knows it too. But what can the hospital do other than to give them state-of-the-art service, and then sometimes later try to recoup some of the losses through innovative bootlegging of other income?

I am always amused at the presumptuousness of motivational speakers who tell audiences of healthcare providers to go to places like Nordstrom and Ritz Carlton to learn how to deliver customer service better. Earth to speaker: the great service at Nordstrom and Ritz comes with a big fat price tag. Try going to Nordstrom and pointing to a pair of $300 shoes and saying: “I don’t have the money to pay for those shoes, but I deserve them because I’m an American.” Try checking into the Ritz Carlton with that same attitude. How quickly do you think you’d be escorted out by security in both places? Yet this is the mindset we Americans often have when we approach health care.

Our health care system is fabulous in many ways. Over the past three days, providers at my father’s HMO located the exact spot in his artery that was 99% clogged, performed an angioplasty, inserted a stent, and did it all with efficient professionalism and gentle courtesy. I am utterly amazed, and grateful.

But our health care system is also sick. Activists talk about the 45 million uninsured Americans, which is indeed a national disgrace. But we also need to talk about our attitudes of entitlement, the kinds of attitudes that say any American deserves any treatment at any time without considering how it’s going to be paid for, and by whom. Until we come to grips with that reality, I don’t know how we can possibly “fix” health care in this country.

Meanwhile, as you read this, remember that the hospital nearest you is humming along, available to you 24/7, 365 days per year, facing situations that leaders in other industries would consider an economic nightmare. The fact that we’re still getting good people in health care management roles is a minor miracle. God bless ‘em—and the doctors and nurses and technicians too.

The Toughest Management Job?

I am convinced that running a hospital must be one of the most frustrating management jobs on earth. That’s because the ordinary laws of supply and demand often vanish, and hospital managers then operate in a bizarre environment where “customers” expect state-of-the-art service, they expect it now, and they expect it for free. After all, customers themselves rarely pay for their health care services. A third party, like an insurer, does—which totally distorts the economics. But if that’s bad, just wait; it gets weirder.

Here’s what hospital administrators have to deal with. A gangbanger is brought into the emergency room at 2 a.m. suffering from multiple gunshot wounds. A half hour later a woman who doesn’t speak English and is in the U.S. illegally is brought in ready to deliver a baby. What do these two individuals have in common? They both know that they’ll never pay the hospital a dime, and the hospital knows it too. But what can the hospital do other than to give them state-of-the-art service, and then sometimes later try to recoup some of the losses through innovative bootlegging of other income?

I am always amused at the presumptuousness of motivational speakers who tell audiences of healthcare providers to go to places like Nordstrom and Ritz Carlton to learn how to deliver customer service better. Earth to speaker: the great service at Nordstrom and Ritz comes with a big fat price tag. Try going to Nordstrom and pointing to a pair of $300 shoes and saying: “I don’t have the money to pay for those shoes, but I deserve them because I’m an American.” Try checking into the Ritz Carlton with that same attitude. How quickly do you think you’d be escorted out by security in both places? Yet this is the mindset we Americans often have when we approach health care.

Our health care system is fabulous in many ways. Over the past three days, providers at my father’s HMO located the exact spot in his artery that was 99% clogged, performed an angioplasty, inserted a stent, and did it all with efficient professionalism and gentle courtesy. I am utterly amazed, and grateful.

But our health care system is also sick. Activists talk about the 45 million uninsured Americans, which is indeed a national disgrace. But we also need to talk about our attitudes of entitlement, the kinds of attitudes that say any American deserves any treatment at any time without considering how it’s going to be paid for, and by whom. Until we come to grips with that reality, I don’t know how we can possibly “fix” health care in this country.

Meanwhile, as you read this, remember that the hospital nearest you is humming along, available to you 24/7, 365 days per year, facing situations that leaders in other industries would consider an economic nightmare. The fact that we’re still getting good people in health care management roles is a minor miracle. God bless ‘em—and the doctors and nurses and technicians too.

A Synergy Fantasy

Barry Diller’s internet conglomerate InterActiveCorp, or IAC, just bought the Ask Jeeves web search company for $1.8 billion. What’s the rationale for this deal? Need you ask? Why, it’s “synergy”.

Ah, synergy—a lovely intellectual justification for so many value-destroying mergers, from AOLTimeWarner to DaimlerChrysler. To understand why synergy looks great on paper but usually collapses in practice, let’s look at the different corporate pieces of IAC and review what could easily be Barry Diller’s synergy fantasy about how you the customer are supposed to fit into them.

Let’s say you’re a single guy looking for love. So you go online to seek the lady of your dreams, and for some bizarre reason you don’t go to Google, you go to IAC’s Ask Jeeves. (Remember, I said this was a fantasy). Ask Jeeves will direct you to numerous dating sites, but of course you choose IAC’s match.com. You locate a lovely damsel in Phoenix, Arizona which happens to be a few hundred miles from where you live. No problem, because after getting hot and bothered with each other via e-mail, you’ll go to IAC’s Expedia to book a flight to see her, and you’ll use IAC’s hotels.com to locate a place to stay in Phoenix.

Why stop there? You’ll want to make a restaurant reservation and check out the theatre scene in Phoenix (via IAC’s Citysearch), and you’ll buy the tickets to the show through IAC’s ticketmaster.com.

Everything goes great in Phoenix. You’re in love! She’s in love! Music is in the air. So back to the web to buy her an engagement ring at IAC’s Home Shopping Network website. Oh happy day—she’s ecstatic with the ring and says yes to your proposal, and you both set the wedding date. Naturally, you direct all of the invited guests to IAC’s gifts.com for wedding goodies.

The wedding goes great. But after your honeymoon (arranged with IAC’s Expedia or IAC’s hotwire.com), where will you live? Fortunately, IAC’s realestate.com will find a fabulous house for you, and IAC’s lendingtree.com will find an even more fabulous mortgage. You settle down to wedded bliss. Your wife plans dinner parties with IAC’s Evite site, and you find the plumbers and contractors for home maintenance through IAC’s ServiceMagic site. But it’s not all work. Since you and your wife do a good job of financial planning—all through IAC’s GetSmart site, of course—you find yourself with enough money to purchase a lovely time share condominium through IAC’s Interval International site. No wonder you’re both smiling. Life is wonderful. The only thing that’s missing in IAC’s menu is caskets.com for when it’s all over.

What’s wrong with this fantasy? Very simple. In reality, through every step of this process, the customer has a gazillion choices and options—both online and physical world—other than IAC. And empowered customers exercise those options regularly. They might sometimes, and selectively, use IAC options, and they might not. The main problem with “synergy” is that those darn customers usually don’t cooperate with our carefully developed plans. The vendor trumpets “one stop shopping!!!” and is amazed when many customers don’t fall into line like zombies. Meanwhile, the combined “synergized” company gets more bureaucratic, more cumbersome, less focused, and less efficient. Often, as is currently the case with IAC, major restructuring occurs to somehow make the package more palatable, and future acquisitions are considered to fill the gaps so that those pigheaded customers won’t be able to go anywhere else. The naiveté of this mindset is palpable, but the market isn’t fooled. After all the serial acquisitions, IAC’s stock is stagnant and is priced well below that of highly focused players like Google, eBay and Yahoo. As is so often the case, I suspect that most of the IAC companies would do better on their own.

Can synergy ever work? Sure. Occasionally. But not nearly as often as its proponents would have you believe. In fact, next time you hear a CEO or analyst use "synergy" to justify a questionable megamerger or acquisition spree, head for the hills! I’m sure you can go to a IAC website to help you get there.