When Being Right is Wrong for Your Business
I’m Right, How Can I be Wrong?
- “ We’ve run out of storage. Let’s build more.”
A factory makes lots of components in-house for their final assembly. Some are cheap and easy to make, some are expensive and have long lead times. So they make the cheap and easy parts around the clock and the expensive ones only to order. But guess what? The cheap and easy parts take up space and soon the warehouse can’t accommodate them. So, the Warehouse Manager calls for more storage space to be built, “ We’ve run out of storage, let’s build more.” He is right about not having enough storage, but wrong about building more of it. Why? Because storage doesn’t add value. In fact it costs money and takes up valuable real estate space. That space would be more valuable for other projects. So, the Production Manager says, ”Let’s just stop making so much of this stuff. Let’s cut back to one shift on that line.” So they do. Problem solved.
- “It’s great for our cash flow. Let’ sell more like this.”
A four star hotel offers their Facebook fans weekend breaks for €100 per person. Cleaning the rooms and providing the food provides them with a gross profit of €40 per person on every weekend sold. They get a great response and soon the hotel is busy with guests, who are enjoying the fantastic value and wonderful facilities in the hotel. The hotel decides to use this as a way of increasing turnover and occupancy and soon it’s a regular offer on Facebook. Their Facebook “like” numbers grow rapidly and the manager is even invited to deliver a seminar on how they increased their Facebook “likes”. But the hotel returns a loss for the first time ever that year. Why? Because they became sales addicts. They never evaluated the impact that selling more would have. They didn’t cover their fixed costs, and they displaced regular guests who spent more in the bar and became regulars. Most guests did internet searches before booking and the numbers paying full price dropped off. Why pay full price when you just wait until Thursday to get an offer? The hotel even did long term damage to their reputation because negative reviews were posted online. Their regulars found the pool crowded, the service patchy and they felt undervalued. The number of Facebook fans that a business has is not in itself a driver of profit. The hotel lost sight of where both their profit and their added value lay and sacrificed it on the altar of sales.
- “The internet is an important sales channel. Let’s build an online shop.”
A shop selling safety equipment decides to put some of their range for sale on the internet, all of which are best sellers and profitable. So they spend €10,000 on a user friendly website and they get lots of visitors to the site but sales don’t materialise in sufficient quantity to make money. How did this happen? They forgot about their competitors for those ranges, sites like Amazon and eBay. Customers are very price sensitive online, they search before they buy. Their competitors were cheaper. In their shop, they gave added value in the form of advice for which people were happy to pay extra. When they went online, they lost their added value. Internet selling is not a silver bullet.
— Vuk Mirkovic (@vukmirkovic) September 28, 2012
I’ll leave the last word to Peter Druker: