Quality leadership is a business model

Common sense says that a good business model rests on selling dear and buying cheap – margin is the difference between price and cost, it makes sense. This thinking, however, is profoundly flawed as it rests on two extremely fragile assumptions. One, that people are willing to pay the price and two, that you can find resources to purchase cheaply. Financiers are always on the lookout for the rare niches where you can sell so high and buy so low that you make a killing, and no doubt some still exist, but by and large this kind of thinking is a throwback from the 1960s where demand far outstripped what was on offer – and even then, companies spent millions on advertising to persuade people to buy their products.

A business model hinges upon value: do customers value what you offer – enough to pay hard cash for it. This is not always the case, for instance they might value a free webinar enough to pay in terms of their time, but not enough to pay a fee. Or they might be willing to pay, but on the lookout for a better offer. First mover advantage is a myth. Many pioneering companies have disappeared, after being caught up by competitors who have perfected their innovative idea. Real advantage lies with the first business to convince the market of their value. Under Steve Jobs, for instance, Apple was extremely good at picking out products with potential on established markets and then building them and marketing them better – who now remembers the Rio digital audio player that was a surprise hit three years before the iPod? Or that GoTo.com (Later Overture) dominated online pay-per-click advertising before Google’s AdWords cracked the relevance puzzle?

Customer value is always in flux, always challenged by changes in customers’ lifestyles and better offers from competitors. Customers may be willing to pay more for a product or service. For instance, iPhone owners pay far more for their smartphone than Android-based alternative – but they need to see the value for their money. In the iPhone case, Apple has managed to convince the wealthy segment of the population that the iPhone was a luxury item, not a commodity, and done so through a very expensive investment in design and stores conceived as luxury exposition sites all over the world.

Same for costs. We’d all like to buy materials or labor cheaper, sure. But the reality is that we pay people the wages the markets pays them locally, and purchase materials and parts on world markets which prices we don’t control. Again, we’re not alone in bidding for contracts. Certainly, large corporations do everything they can to locate production in lower wage areas, but then they have to pay the cost of supervision, training and transport – which altogether doesn’t come cheap either. Just as prices are largely in customers’ control, purchasing costs are in suppliers control.

Marketing classes will make you believe that you control your 4Ps: price, product, distribution and promotions. It’s an illusion. You do write the price on the tag, but really customers and competitors set the price. You design the product you like, but really, customers choose the products that best serves their purpose. You can try to control your distribution and placement, but in real-life, how likely are you to control distributors? And finally, yes, you can give all the rebates you like, but sooner or later you’re going to hit your internal costs barriers and lose your shirt.

What can you control to make your business succeed? You can’t control price but you can control your value proposition – what you offer customers for their money compared to what competitors are offering. You can’t control costs of what you purchase, but you can control how you use time and material in order to deliver the product and service.

If we turn traditional thinking on its head and assume that we can’t control prices – both selling and purchasing – we can turn our attention to real-life value: usefulness/cost. If we look at it this way, we can see that the one thing that is under our control is the method we use to deliver this value. Our value proposition is the differential between our value offer and its design, production and process costs (as well as company overheads):

The key insight is that we don’t control things or events – we control our method to deal with them. If we’re serious in delivering continuously and sustainably a competitive value proposition we need a company-wide method that will continuously enhance our usefulness to customers and lower the costs from using work and materials available on world markets. We need a method that generates, while we work, the kind of learning opportunities that will make us improve.

IMPROVE QUALITY AND ALL ELSE FOLLOWS

This method is to focus on quality first. Once you work on quality, everything else falls in place:

Discovering a quality issue, wherever and whenever, looking into it and asking why? Repeatedly until getting to the bottom of if will always reveal a flaw in the method we use. Quality is the entry point to improving our customer value proposition. The cornerstone lean insight to constantly upgrading your value proposition is: start with quality – all else follows.

Working with quality, however, poses the thorny difficulty of engaging people in thinking about quality on a daily basis. This is not easy because:

1. People shun sharing unfavorable information with their bosses and colleagues: when there is a quality mishap, the first reflex is to keep it quiet and rectify it, hoping no one will noticed – no one wants to be close to a problem in case some blame might splatter and stick
2. Managers rarely prioritize quality problems: quality issues are rarely simple – in Raynor’s terms they are messy, strange and dicey whereas cost issues appear tidy, familiar and reliable. Managers often set quality issues aside to focus on other, more solvable, problems.
3. Quality is often vaguely defined and different people will have different notion of quality work: it’s very hard to have a constructive discussion when fundamental assumptions about what is quality work diverge widely.
4. People often feel quality is out of their control: they’ve been told to work the system with the equipment and methods they’ve been give, and their outcomes are a result of the system – not something they can do anything about by themselves.

These four issues are leadership issues. To continuously support a winning customer value proposition, leaders must create a culture that 1/ finds quality problems routinely to investigate them, 2/ faces quality issues even when they’re not simple to resolve, 3/ frames quality in a way all people can understand and participate in so that they 4/ form better solutions by improving not just work, but our work methods on a daily basis.