Sunday, August 26, 2007

What Makes a Guarantee Extraordinary?

"Create a market offer so good, that your customers can’t refuse it and your competition can't or won't offer the same – that’s a “mafia offer”!”

"A Mafia Offer is saying what you are going to do and doing what you said, when you said you would do it and backing it up with a penalty."

Dr Lisa Lang


This article appeared in the March 2007 issue of Chief Executive. It describes the benefits of providing an extraordinary guarantee which is one aspect of a good mafia offer (unrefusable offer, irresistible offer). An extraordinary guarantee is necessary for a good mafia offer, but not sufficient.

In Theory of Constraints we want to guarantee (usually with a penalty) something that you competitor can't or won't match. The guarantee or penalty should be big enough so that your customers know you are serious and so that your competitors won't match it.

To download this article, click here.

********************** start article *******************************************
What Makes a Guarantee Extraordinary?

Unlike typical, mundane guarantees that protect companies more than their customers, an extraordinary guarantee is a powerful promise, backed by a Draconian payout that forces a company to keep it— or else! Such a guarantee has three vital components: the promise, the payout and the payout process.

The Promise:

An extraordinary guarantee promise is a no-holds-barred statement of the benefits a company commits to providing its customers. Notably absent is the fine print that lards typical guarantees down with restrictions customers immediately see as self-protecting “weasel words.”

Take Hampton Inn, which in 1990 was one of the first companies to implement an extraordinary guarantee. Every guest is greeted at check-in by signs stating: To make sure guests get the message, front-desk people are trained to ask, “Are you familiar with our 100 percent guarantee?” Any hesitation produces an explanation that leaves no doubt that Hampton is serious about living up to its promise.

The Payout:

If customers don’t get what they’re promised, an extraordinary guarantee includes a payout that leaves them thinking, “Wow!”

This idea is counterintuitive and scary at first. The knee-jerk reaction of nearly all CEOs is, “That would cost us a fortune!” reflecting a lack of confidence in their company’s ability to consistently provide customers with the benefits they promise. That is exactly the point.
The seemingly breathtaking risk an extraordinary guarantee embodies jolts an organization. “Are you serious? Do you know what would have to change before we could do something like that?”

But when, like Tom Jones, you respond, “Not only are we serious, but I challenge everyone in our organization to think through what changes we would need—and how to make them,” the result is the rapid improvement necessary to offer an extraordinary guarantee with confidence that invocations will be rare. Like in JIT, the painful consequences of not making necessary changes ensures that they are made.

A guarantee payout that would inflict significant pain on your company will also stun your competitors.

How would you feel if you suddenly learned that a major competitor was targeting your most coveted customers with an extraordinary guarantee? “They’re doing what? Are they crazy?” After much gnashing of your executives’ teeth, the inevitable conclusion would be: “Maybe they’re crazy—but we’ve got to respond!”

Suppose, though, that your company did a textbook job of guarantee design and implementation, forcing your shocked competitors to respond. The typical competitive response would be a guarantee that is similar—but only on the surface. To believe that a company could offer an extraordinary guarantee with no planning or preparation is ludicrous.

First, employees, uninformed, untrained and having done nothing to become guarantee-ready, will shake their heads in disbelief: “They’ve decided to do what?” They will correctly conclude that management has made one of the great bonehead moves of all time. What they don’t know, of course, is that sharp minds have tweaked the guarantee to minimize the possibility of any customer invoking it, and that those who try will find themselves in a meat grinder involving proof, investigation, multiple levels of approval, lack of response to questions—the list goes on.
Nearly all customers, however, will be quick to sniff out the guarantee’s holes, embarrassing any salespeople na├»ve enough to pitch it. The result will be exactly the opposite of the differentiation and loyalty a true extraordinary guarantee creates. As the reality of its folly sinks in, your hapless competitor will hope its guarantee fades into obscurity before it does too much damage.
Too late. Its aborted effort is your gain, strengthening your extraordinary guarantee’s credibility and giving weight to the idea that your firm not only claims to be, but actually is, the best. That’s competitive strength. CEOs should never forget that a strong payout is the linchpin of an extraordinary guarantee’s power.

The Payout Process:

So you offer a guarantee with a strong promise and a meaningful payout. Great—but not if customers find the payout process to be as enjoyable as passing kidney stones.
First, an extraordinary payout process needs to be proactive and empathetic.

At Hampton Inn, nothing impresses guests more than seeing their bills ripped in half when they mention a problem during checkout. Second, the payout process must communicate your intent to find and rectify the causes of customer problems—or they’ll assume that the problems will reoccur. Finally, you must reach out to customers when you have dealt with the causes of their problems. Thank them for providing valuable quality-improvement information, let them know what action you’ve taken, and give them a token of your appreciation.

Amazingly, this last step—reaching out to customers—rarely happens. When was the last time you received this kind of communication from a company? If you did, how would you feel? Now the killer: What would happen if your customers felt this way about your company? An extraordinary guarantee creates the opportunity to find out.

Ironically, whenever a company’s executives explore the extraordinary guarantee idea, someone makes the point, “If one of our good customers has a serious problem, we always end up doing what it takes to satisfy them anyway. Why do we put them through such torture?” Inevitably, a chorus of nods follows.

What are the chances of the same situation playing out in your company? Pretty high, I’ll wager. Over the years, protective layers build up that do nothing but waste resources and corrode customer loyalty. Simply exploring an extraordinary guarantee will bring this insidious problem to the surface and create an opportunity to slice through the web of counterproductive policies and procedures that rarely get any attention.

The Financial Case

Tom Raffio is the CEO of Northeast Delta Dental, which provides dental insurance to employers in Maine, New Hampshire and Vermont. Following is an excerpt from a letter he wrote to me:
“Much of our success is directly due to the quality culture created by our Extraordinary Guarantee. It has been responsible for the overwhelming majority of our company’s growth in subscriber base, customer retention, reserves and corporate reputation. Our ‘smooth conversion guarantee’ has been particularly instrumental in landing new corporate customers.

“The guarantee has been the catalyst for our process improvement efforts, ‘closing the holes in our hose’—an analogy I first heard from you [that we still use].”

The company credits its extraordinary guarantee for its ability to win the Granite State [Vermont] Best Place to Work Award four out of the first five years it was offered and, two years after entering national competition, be named the Best Small Company to Work for in America.

The improvements the extraordinary guarantee spawned have also enabled Northeast Delta Dental to charge prices 20 percent higher than those of the competitors, while simultaneously increasing its market share from less than 25 percent in 1995 to over 80 percent in 2006. Now that’s a financial case!

Christopher W. Hart, Ph.D., is an adjunct professor at Babson College and a former professor at Harvard Business School. He also is president of Spire Group (http://www.spiregroup.biz/), a management consulting and executive- education firm. His email address is chart@spiregroup.biz.

********************** end article *******************************************

Friday, August 10, 2007

Book Review: Blue Ocean Strategy

Blue Ocean Strategy: How to Create Uncontested Market Space and Make the
Competition Irrelevant
by W. Chan Kim and Renee Mauborgne.


This review will focus on pointing out those things that are consistent with Theory of Constraints (TOC) and my opinions from those things that are not.

The authors have done a nice job of explaining the problems with current strategy and market development techniques. Specifically, I agree that:

  • "... with supply exceeding demand in more industries, competing for a share of contracting markets while necessary, will not be sufficient to sustain high performance." pg 5
  • "The result has been accelerated commoditization of products and services, increasing prices wars, and shrinking profit margins." pg 8
  • "In overcrowded industries, differentiating brands becomes harder in both economic upturns and downturns." pg 8
  • "The trend toward globalization has compounds the situation." pg 8

No question. There is a problem. We can't continue to do things in the same way and expect different results. However, I believe that a couple key assumptions have lead the authors astray.

Here is what I don't agree with:

  • "To seize new profit and growth opportunities, they need to create blue oceans." pg 5

Blue oceans are new products in new markets/industries and I believe that in many cases this is an invalid assumption -- that you MUST create new products and/or new markets/industries to substantially grow profits. I believe that this is invalid because we have experience in creating irresistible market offers that we call Mafia Offers. These Mafia Offers are typically for existing products in existing markets. The reason we focus our Mafia Offers develop on existing products in existing markets can be traced back to the 5 Focusing Steps that were discussed in The Goal by Eliyahu M Goldratt:

  1. IDENTIFY the system's constraint.
  2. Decide how to EXPLOIT the system's constraint.
  3. SUBORDINATE everything else to the above decision.
  4. ELEVATE the system's constraint.
  5. If in the previous step the constraint has been broken, go back to Step 1.

If your system's constraint is the market, then new products or new markets/industries is an ELEVATION step. I believe that before we elevate we should first try to get more (EXPLOIT and SUBORDINATE) out of what we already have.

The authors then address the risk associated with new products in new markets/industries:

  • A systematic process will minimize risk to expanding into new products and/or new markets/industries. I agree with this, but then they go on to imply that it would be no more than the risk of strategies around existing products/markets/industries.

I think the business owner who was investing in the new development would disagree.

In contrast, a good Theory of Constraints Mafia Offer will achieve all the positives of a blue ocean strategy without the risk. Because mafia offers are developed on existing products/markets/industries and with little or no investment, it is an EXPLOIT and SUBORDINATION step.

Okay, now back to more about what I liked:

  • If and when you need to develop new products/markets/industries then I think the process outlined by the authors is very good.

Almost everyone at some point WILL need to develop new products/markets/industries and I liked this approach. I do think it would be difficult to implement the approach just based on what's in the book. But the framework is there.

Here's to maximizing YOUR profits!

"Dr Lisa" Lang

(c)Copyright 2007, Dr Lisa, Inc. All rights reserved.

Need an example of a Mafia Offer? http://www.podcasternews.com/programs/87/better-process-podcast/3574/?A=1

Wednesday, August 1, 2007

Pricing using Theory of Constraints – Q&A

I have not yet finished Blue Ocean Strategy. I will explain why when I post my review.

I have, however, received a pricing question and have written an answer. Enjoy.

Q: What about companies that have a market constraint and use S-DBR?

A: For companies that have a market constraint, I still recommend that they strategically place an internal limiting resource (control point) and use this strategic constraint to determine pricing and product mix.

We find that there is huge variation (+/- 50%) in pricing amongst and between competitors. So determining what is competitive is even a challenge. We use catalogs, industry studies, etc to help with this determination when those are available. Most of the time, we don’t have this information, so we use the technique we were all taught (TVCs + allocated OE + reasonable margin = price). We then ask our prospects/customers by how much did we miss the order or how far off was our closest competitor. Purchasers don’t typically tell us what the other prices were, but they will tell how by what % we missed it or got it.

How/when you modify pricing (in my opinion) depends on the type of offer you have. If you have an offer where you get premium pricing (like the Rapid Response mafia offer) you need to ensure that your standard price (at standard lead-time) is competitive because no one will pay a multiple of a price they perceive to be too high. We have had some situations with this offer where the standard price was not attractive to us (low T/CU) but we needed to offer this product to get the higher T/CU products. In that case we raise the price as much as we can but to still be considered competitive and then we also increase the standard lead-time. So, if we don’t like the price, but it is competitive, we increase the lead-time.

If we are dealing with a VMI type mafia offer than we typically start by matching the current pricing (assuming it is competitive a close to our target T/CU) then getting an increase after proof of concept. We have been successful at getting 2 to 12% increase.

When we consider increasing prices we take into account: T/CU of the product, total $T of the product, weighted average T/CU for the customers buying this product, and total $T for the customers buying this product. If we lose the sales of the product or sales of an entire client we need to understand by how much our T will go down.

Here's to maximizing YOUR profits!
"Dr Lisa" Lang
(c)Copyright 2007, Dr Lisa, Inc. All rights reserved.

P.S The next open to the public Maximizing Profitability event is Aug 28 in Denver, Colorado. This is a no charge half day event. To register go to http://www.viable-vision.com/

P.S.S The next mafia offer boot camp is August 29, 30, 31 in Denver or schedule a private one at your place, on your time frame! http://www.mafiaoffers.com/ We’re coming to New Zealand and Australia for boot camps in December!

P.S.S.S. Check out our new Theory of Constraints Pricing Project! http://www.scienceofbusiness.com/Default.aspx?tabid=144

Mafia Offer Podcast #1: http://www.podcasternews.com/programs/87/better-process-podcast/3574/?A=1

Purchase Dr Lisa’s book, Achieving a Viable Vision: http://www.scienceofbusiness.com/Default.aspx?tabid=133