Breaking bottlenecks

 Some people are born to break the rules. Most aren’t. And this, it turns out, is bad for business.

Think about the ways that most companies try to get an edge over the competition. They try to find new market segments, identify cost savings, or try to retain the best people by putting fruit out in the kitchen once a week. These measures will yield incremental improvements at best.

But what about the revolutionaries? The ones that flip two fingers at ‘how things work in our industry’ and overturn convention to create a brand new model that changes their sector’s landscape forever. For airlines, high-priced landing fees are just part of the cost structure, aren’t they? Ryanair didn’t think so, and turned Europe’s unused World War II landing strips into very low cost ‘airports’ to land their planes. Over the past five years, we’ve worked with more than 50 small and mid-sized companies that, instead of being hamstrung by the challenges that ‘everyone in our industry faces’, have looked far beyond fixing their own company’s issues to a far broader horizon – the bottlenecks of their whole industry.

By stepping back and taking a macro look at the field you work in, the changes you make put you ahead of the rest by default – if it’s an industry-wide problem you solve just for your company, all your competitors are immediately found wanting. Solutions fall into five categories – ‘levers’ – that successful companies use to open a gap in their industries. They are:

• Eliminating expense 
• Remaking the customer buying experience
• Overcoming customers’  psychological barriers 
• Winning hearts and minds
• Eliminating negative externalities

Five companies, five levers

Redbox: space and staff out, profits in

If you told someone pre-millennium that they’d be renting their DVDs from a vending machine, they’d most likely stifle a chuckle. But in 2002, they would do just that. And they’d rent it from McDonald’s.

In 2002, the new venture unit of McDonald’s was looking for ideas that could drive additional traffic to the company’s restaurants. They tested two automated vending concepts – one selling milk and convenience products, the other renting DVDs. The DVD concept appeared to hold promise.  

‘Redbox’ needs no on-site staff and next-to-no location space. The paltry $15,000 McDonald’s put into the start-up eliminated so much expense from a regular DVD rental company’s profit and loss statement that by 2007, they were the fifth largest movie rental company in the US. Redbox’s disruptive elimination of ‘taken as given’ brick-and-mortar cost categories had surely and swiftly taken its toll on the industry. In 2013, some 68% of the American population lived within a five-minute drive of a Redbox kiosk. Whether digital streaming of movies from the likes of Netflix will successfully disrupt the Redbox model remains to be seen. By streaming its movies, Netflix, an old hand at the break-the-industry-bottleneck game, eliminates yet another cost: the disc itself!

Bonobos: Pants to shopping

Established in 2007, apparel company Bonobos broke two bottlenecks at the get-go by selling well-fitting jeans and trousers at a reasonable cost. In 2011, they set out to break another one – the pain of buying and returning them online. Now with 11 locations in major cities from New York to San Francisco, they have a small space to showcase the merchandise in a full array of sizes and styles, but do not hold stock, thereby getting rid of both the supply chain challenges that brick-and-mortar retailers face as well as addressing the ‘try before you buy’ challenge that plagues online retailers. 

Now offering a full range of men’s apparel and with revenue topping $40 million, according to one estimate, breaking three industry bottlenecks has served Bonobos well.

Hyundai: Anti-anxiety, pro-spending

At the 2009 Super Bowl third quarter ad break, against footage of a Hyundai driving through a green landscape, a voice-over announced: “Introducing Hyundai Assurance. Now finance or lease any new Hyundai and if you lose your income in the next year you can return it with no impact on your credit.”

Remember that at the time, the world seemed to be falling apart. Banks were failing, a stimulus package had yet to be passed, and unemployment, which was swiftly approaching 8% (up from 4.8% in the fourth quarter of 2007), was taking a toll on consumers’ psyches.

Hyundai had overcome a key psychological impediment that was blocking customer demand for cars – not just Hyundais – but all cars. Its market share increased to 4.3% in the first ten months following the Hyundai Assurance announcement (up from 3.1% a year earlier). The buy back guarantee was in place from 2009 until 2011; those two years brought sales increases of 8% and 24%, respectively. And, better yet, Hyundai only had to buy back 350 cars.

Appletree Answers: Living the dream

One day in late 2008, Appletree Answers founder and CEO John Ratliff was having a beer with a fellow entrepreneur. Both ran a network of call centres. Upset about his yearly 110 percent employee turnover, Ratliff presented the problem to his drinking partner. “That’s incredible!” his friend said. His was 300 percent.

The problem still irked him nonetheless. To retain his employees, he would have to win their hearts and minds. But how? The Appletree team pulled together 50 ideas. In the end, the one they loved best was what they called Dream On, a concept borrowed from the Make-A-Wish Foundation. Front line employees gave their ‘dreams’ to the executive team with the promise that some would be chosen and fulfilled. His first submission was from an employee going through a divorce: “She had been kicked out of the house with her two kids and they were living in a car,” remembers Ratliff. This employee’s dream was an apartment in which to raise her two kids. Appletree paid her first and last months’ rent and security deposit for the apartment, and purchased over $1,000 worth of furniture. 

Dream On spread like wildfire and Ratliff was soon receiving tons of dream requests. Over a period of four years, at a total cost of about $400,000, the company granted a total of 275 dreams: honeymoon trips, headstones for lost loved ones, birthday parties for employees’ children, and more.

By the time he sold Appletree Answers in 2012, after having been listed on Inc. magazine’s list of the fastest growing companies in the US for seven consecutive years, staff turnover had decreased from 110% in 2008 to 30% in 2012. Breaking the industry’s bottleneck by grabbing the attention and loyalty of frontline employees could have been the best thing Appletree ever did. 

Holganix: Fertile ground for growth

In the summers, Holganix CEO Barrett Ersek would spend his weekends fishing for striped bass in the Chesapeake Bay. Each year there was more and more conversation about the detrimental effects chemical fertilizers were having on the fish population and marine life in the Chesapeake. Nasty environmental side effects of keeping lawns weed-free and green were an industry-wide problem. 

In 2008, Ersek owned a lawn care company called ‘Happy Lawn’. Fertilizer costs were skyrocketing. In an effort to control expenses he stockpiled his warehouse with $1 million worth of fertilizer. Unfortunately, it burnt to the ground.

As luck would have it, he stumbled across an organic, bionutritional turf fertility product – Holganix – with dramatically reduced amounts of nitrates, phosphates and pesticides, eliminating a previously considered necessary evil in the industry. Happy Lawn quickly became Holganix’s biggest customer, and over time Ersek became more and more involved with the business.

In 2010, Holganix stated its goal of eliminating 100 million pounds of nitrates, 25 million pounds of phosphates and 100 million ounces of concentrated pesticides from entering the universe by Earth Day 2016. Today, with notable users including the Pittsburgh Pirates, the Tennessee Titans and the Boston Red Sox, along with world championship golf courses, national lawn care companies and Ivy League universities, they’re well on track to do so. 

Challenging the often silent assumptions that comprise ‘business as usual’ in your industry reveals a menu of possibilities that might become breakthroughs. So how can you find bottlenecks to break in your industry, or in one you think you can disrupt?

• Look at the diagnostic levers and seek at least five bottlenecks in each category – that’s step one. Don’t forget that you’re looking for bottlenecks offering drastic change if broken, not just incremental improvements. 
• Step two is to whittle the resulting list of a couple of dozen possible industry bottlenecks across the five levers to the one or two that hold the most promise. This is the tough part. How might this whittling be done?
• Ask whether the biggest, best, and most profitable companies in your industry are subject to the industry bottlenecks you identify. For example, Blockbuster’s expenses for store rent and payroll were substantial. 
• Look for similarities in other industries. Has someone done something like this elsewhere? If so, that’s a good sign. 
• Ask whether an industry bottleneck you’ve identified would bring about a seven to ten times change. If the answer is yes, it’s a good metric for evaluating success. 
• Build a rhythm. We suggest that you repeat the process, applying the levers every 90 or 180 days. People will copy you, at least eventually, so you’ll probably need to carry on finding additional industry bottlenecks, to keep you ahead of the pack. 

The examples we’ve brought to life are but the tip of a large iceberg. Instead of remaining mired in the quicksand of business bottlenecks – the day-to-day issues whose solutions may yield a bit of improvement –uncovering your industry’s bottlenecks can help you compete in ways you never thought possible. And how good would it feel to hear the sound of your competitors all kicking themselves at once?

Sidebar 1: Diagnosing Your Industry’s Bottlenecks

Diagnostic levers	Diagnostic questions to ask about your industry (or an industry your capabilities might allow you to enter and disrupt)
Eliminating expense	What are the largest expense categories in your industry which, if drastically reduced or eliminated in your company, would allow you to get competitive advantage?
Remaking the customer buying or usage experience	What elements in the typical buying or usage experience in your industry impede demand, which if drastically reduced, changed or eliminated in your company, would allow you to get competitive advantage?
Overcoming customers’ psychological barriers	What emotional or psychological barriers in the minds of your industry’s main customers impede demand, which if drastically reduced or eliminated in your company, would allow you to get competitive advantage?
Winning hearts and minds	What disenchanted or not very engaged group of people in your industry or its value chain, which, if your company won their hearts and minds, would allow you to get competitive advantage?
Eliminating negative externalities	What negative externalities does your industry generate, which if drastically reduced or eliminated in your company, would allow you to get competitive advantage?

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