One simple decision: The secret of Trader Joe’s lasting success

Trader Joe’s is one of the most successful grocery chains in the US.

In 2008, BusinessWeek reported that the company had the highest sales per square foot of any grocer in the United States.

In 2016, Fortune magazine estimated the sales to be $1750 per sq. ft. More than 2x Whole Foods, with a much larger footprint.

And to top it off, Trader Joe’s was one of the fastest retailers to recover from the COVID-19 lockdowns in 2020. As of Oct 2020, Whole Foods traffic was down 20%-30%, but Trader Joe’s had almost fully recovered.

I work in retail too, so I was quite impressed. And intrigued. What creates such sustained leadership?

So, when I heard that Joe Coulombe’s memoir had just been published (from this tweet by Sajith Pai), I immediately got the book and dug in.

Becoming Trader Joe is about the first 30 years of the business – 1958-1987.

As I looked at all the strategic decisions that made Trader Joe’s (TJ) a retail powerhouse, one thing struck me.

There weren’t that many decisions!

Peter Thiel loves to ask, “What’s your secret?”

And boy, Trader Joe’s has a secret. And it’s hidden in plain sight.

Don’t make 100 decisions when one will do.

This is my favorite Peter Drucker insight: “Don’t make 100 decisions when one will do”. I wrote about it in How to manage your team LIKE A BOSS (even while working remote):

Yes. No. Reject. Accept. Counter-propose. Invest. Hire. Don’t Hire.

Making decisions is tiring.

Whether a decision is big or small, there is some overhead to making good decisions. You have to debate the choices, reflect on them, make the decision, and then follow-through to execution. Making decisions takes something out of you.

As a self-interested manager, it’s clear where you want to go – make fewer decisions, but get the same output. i.e., managerial leverage.

How do you make fewer decisions? By focusing not on tactics, but on strategy. Not on the chaos, but on the concept.

By not deciding on each specific choice you’re asked to make, but by laying out a principle for all such choices. So that your teams can make these choices on their own – you don’t need to decide on that topic again.

Now, Drucker said this about team management, not business strategy. But it applies here too.

Joe made one decision back in 1958. One simple decision. 64 years ago. And it still has ramifications today.

“I will have the highest paid employees in retail.”

This simple decision has reverberated through the years, making TJ what it is today. This one statement is the secret of Trader Joe’s success.

We think of business strategy as a series of interlocking decisions. Like the 4Ps we learned about in Marketing Strategy 101. Product, Price, Place, Promotion (sometimes there’s a fifth – People).

But far more often, it’s not that many decisions.

It’s only 1 or 2 key decisions. The rest is an iterative search through option space, to find the one configuration that fits.

Strategy is not drawing mind-maps in an ivory tower.

Instead, it’s a furious search for the magic pattern where everything just clicks.

Top 1 Tom Cruise GIFs by jdub85 | Gfycat

But Minority Report is not the perfect analogy. In fact, strategy is a lot like the game of Wordle.

Unless you’ve been living under a rock, you know what Wordle is.

The aim of Wordle is to guess a five-letter word. But you don’t have to guess all five letters individually. If you’re lucky and you get one letter at the right place (i.e., it turns green), sometimes the whole word becomes easy to guess.

That’s how it was with Trader Joe’s.

One simple decision. Which drove everything that Trader Joe’s did. And created a lasting, successful retailer.

I will have the highest paid employees in retail.

But before we get into that, let’s appreciate how radical this decision was (and still is).

Grocery retailers win by keeping costs down.

The assortment across retailers is largely the same – they all carry the same mass consumer brands. They win by becoming the place for customers to shop.

  • wider assortments (which mean larger / more stores = high real estate costs)
  • better deals (= lower prices)

Ergo, you need to keep employee costs down.

But Joe went in the opposite direction!

He said he wanted to keep employee costs up. And if they weren’t high enough, well then raise them some more!

Which made all the downstream choices radically different too.

#1: It drove the choice of consumer.

If you’re going to have the highest paid employees, you need to have the highest gross profit. Which means:

  • You need high-margin products.
  • You also need high productivity on these products.
  • Therefore, you still need to offer great deals

Joe hit upon a target segment that ticked all the boxes: “overeducated but underpaid consumers”.

These consumers will make highly discretionary purchases, that would be more expensive. In 2022, these are the folks who buy alternative milks instead of full-fat dairy.

But because they’re underpaid, they’ll also be looking for bargains on these products.

So, if you can give them a great bargain on high margin products…

#2: It drove the choice of product assortment.

If you need to make higher margins than other retailers, you need to carry different products.

Every other supermarket in the 1960s carried the same popular brands from Procter & Gamble and other consumer majors. So, TJ went the other way – only private labels and unbranded products.

But not just any product. Only those where Trader Joe’s could offer a better quality at a lower price. While making a great margin.

Sounds hard? Well, lucky that TJ had the best employees in retail…

This was the most interesting part of the book.

Every retailer has a buying / procurement function. But Trader Joe’s made that its core differentiator. It focused on it so sharply that it cut through the noise.

In fact, TJ didn’t have a fixed assortment. It kept evolving, to ensure that this remained its core differentiator.

TJ changed its positioning 3 times in 3 decades, with focus on its core customer all through.

A. In the 60s, Trader Joe’s positioning was “Good time Charlie”.

In the 60s, California (where TJ started) had very protectionist laws around sale of alcohol. But Joe and his team read the laws with a magnifying glass, and found loopholes that others didn’t.

They hunted around to buy an old alcohol license, so they could get grand-fathered into new regulations with lower import tariffs.

And so, while other neighborhood grocery retailers couldn’t carry any alcohol, Trader Joe had the widest assortment of the best wines, at the lowest prices.

Wines for the sophisticated palate, at affordable prices (remember: overeducated but underpaid?).

B. In the 70s, “Whole Earth Harry”.

California relaxed its regulations on alcohol in the early ’70s. TJ no longer had any differentiation there. So it shifted – following its consumers – to focus on sustainability and safety.

The assortment changed:

  • Albacore fished on long lines instead of nets, to be cruelty-free
  • Cold pressed peanut oils
  • Phosphate free detergents

The company also introduced creative ways to nod to its consumers’ sophistication.

→ Produce with vintage printed on the box – like wine. “This corn was harvested in Spring 1975”.

→ Private labels with literary allusions – Sir Isaac Newtons, Bagels Spinoza, etc.

All to cater to this overeducated consumer target segment.

C. In the 80s, “Mac the Knife”

As other retailers caught on to the sustainability fad, it was time for TJ to change – yet again.

It went back to the roots of what it means to be a retailer.

The company outsourced everything else (I wrote about this in “Sell the Mailroom!”), and focused on its core value proposition. Buying and selling.

“All the best products, at the best prices”.

No fixed assortment. What you see today in store might not be there tomorrow. This created FOMO among all its loyal consumers.

And the P&L didn’t lie.

In those 10 years (1977-1987), the company quadrupled revenues and grew profit nearly 9 times!

#3: It drove the choice of location.

Trader Joe’s was a neighborhood grocery store, but it couldn’t be in just any neighborhood.

To have the highest paid employees in retail, you need the highest sales throughput. So only the best locations, where productivity could be high enough.

And all stores were near major institutes of learning, corporate offices, or retirement villages. Where the target segment was likely to be.


All these downstream decisions, chosen almost by default after that first decision.

But the most powerful part – the secret – was how it made Trader Joe’s unmatchable.

Without making the same choice – “I will have the highest paid employees in retail” – no other retailer could compete with Trader Joe’s.

That’s the real secret of Trader Joe’s success. That the entire strategy turns on this simple decision – you cannot beat Trader Joe’s without making this decision.

In a sense, this decision became TJ’s moat.

The secret of Trader Joe's success

“Highest Paid Employees” as Trader Joe’s moat.

Whether Joe Coulombe predicted it or not, this mantra gave TJ immense defensibility. So much so that even now, 60+ years later, it’s one of the US’s most profitable retailers.

It reduced attrition. And improved customer service.

The retail industry is notorious for staff attrition. You hire someone and train them well, and then they leave.

Not at Trader Joe’s.

Folks in stores were paid as much as, or more, than people in desk jobs at HQ. So, not only did they not leave for greener pastures (there weren’t any!), they also didn’t clamor for a promotion to HQ!

And when you have low attrition:

  • You have low training costs
  • You have better customer service

It created durable consumer trust and loyalty.

By honing its buying capability, TJ created consumer trust. People who shop there know that they’re getting bargain prices, on the best products. They will not get these prices anywhere else, or at any other time.

This creates two emotions in consumers, which seem opposite to each other:

  • Loyalty: “I know Trader Joe’s will have the products I want, at the best prices.”
  • Impulse: “This product is at a great price! I better buy it now, they might not have it tomorrow!”

Now, these two advantages are great. But you can lose them over time.

If not for the most important driver of defensibility…

You get what you pay for.

By having the highest-paid employees in retail, Trader Joe’s also got the best employees in retail.

Not rule-followers, but maximizers. Not processors, but improvisors.

The first COVID lockdown in 2020 was a great illustration of this. Remember when consumers were panic buying everything? Remember the toilet paper shortage?

From the company’s podcast in May 2020 (Episode 25):

Tara (Marketing Director): Let’s go back a little bit because I want to talk about some of the things that the folks on our buying teams, very specifically, were doing during that phase of this that was really the huge impulse. Almost like a panic buy.

Matt (VP Marketing): The buying team was calm and methodical and really looking at ‘what do we need’ and ‘how can we best fill that need’. And it turns out by looking in places other than the usual places. You might see a five pound bag of rice where we previously only sold a one pound bag of rice.

Tara: I’m going to share the toilet paper story. (laughs)

I opened up my email one morning and there was an email from someone I didn’t know who was an executive at an international hotel chain saying, “Our business is down. We’re not using a lot of the things that we’ve contracted for. We have some of this, we have some of that.”

So I forwarded that email to the folks who manage our buying teams and I instantly got a message back from one of the folks on our buying teams who just said, “Toilet paper!!” with big exclamation marks at the end. Within a week and a half, we had made a deal to buy toilet paper from this large international hotel chain that suddenly didn’t have guests staying in their hotel rooms. You get to a Trader Joe’s when they have it in, because it comes and it goes and it’s, you know, it’s there and then people buy it and it’s gone. And it comes back. But we’re selling individual rolls of toilet paper that were originally intended for use in hotel rooms.

Matt: Those weren’t retail ready packages and specifically they didn’t have what’s known as a universal product code, the barcode, the UPC, so these didn’t scan at the register. And for a lot of retail businesses, that would be a make or break deal. But we figured out that, you know what, our crew is smart, they’re capable, we can figure out how to do this. We can ring it up manually. And that’s what we’ve been doing. I just love how it’s summarized in this store sign that I saw…I’ll just read the sign to you. “April break getaway canceled? Don’t worry. Now you can enjoy a hotel toilet paper experience in your own bathroom.”

When you pay top salaries, you get top people.


Sometimes, moats (and secrets) endure.

When Joe Coulombe quit TJ in 1987, he told the team that the true test of his leadership would be in the years after he left.

Coulombe was succeeded as CEO by John Shields, who was at the helm from 1987-2001.

In that time, the company expanded out of California – to Arizona, the Pacific Northwest, and the East Coast as well.

Between 1990 and 2001, Trader Joe’s quintupled its number of stores. And grew profits ten-fold!

I’d say Trader Joe Coulombe passed that test with flying colors.

Fortnite, Apple, and the Fate of the Metaverse – A Game Theory Perspective

I woke up Friday morning to see this video trending on Twitter.

I thought it was quite epic. Fortnite mocking Apple with a parody of its own iconic Super Bowl commercial from 1984. (See original below if you haven’t).

Now, I don’t play Fortnite, but I have been following the ongoing war (if only of words, until this week) between Epic Games (the maker of Fortnite) and Apple.

But when the two players took it up a few notches this week (Apple banned Fortnite on the App Store; Epic released the video above, and also started a lawsuit and a PR campaign against Apple), my first thought was: “Such an interesting move!”

Because that’s what this is – one move, in an ongoing battle of wits between the two players.

And like all games, it can be analyzed, to predict the outcome.


But first, an overview of the game board.

If you’re already familiar with Fortnite and the ongoing saga, feel free to skip this section.

But if, like me, you haven’t played Fortnite and are wondering what the fuss is about, read on.

Fortnite is an online video game developed by Epic Games. It’s quite new – launched only in 2017. But it has been a gargantuan success – in just 3 years, it has amassed 350 million users (as of April 2020).

Beyond being just a game, it also doubles up as a virtual world for people to interact. Think Second Life, only much better. Think Metaverse, if you’ve read Snow Crash. Or the Oasis from the movie Ready Player One.

Like most games, it has a mobile app for iPhone and Android. And like all mobile games, it has to pay Apple and Google a cut (30%) on all in-app purchases.

In Fortnite, players can buy skins, “costumes”, or virtual currency called V-bucks (1000 V-bucks for $9.99) for use in the game. This is a substantial source of revenue for Epic Games. Fortnite brought in USD 1.8 Billion in revenue in 2019. Of course it pinches to give Apple 30% on all purchases.

Epic has tried to push Apple to waive this fee for Fortnite in the past, but Apple has stayed firm.

So, this week, Epic snuck in an update in its mobile app, allowing users to purchase V-bucks directly from the company, side-stepping the App Store’s 30% commission. Something Apple prohibits developers from doing.

And so, to nobody’s surprise, Apple banned the app.

And Epic immediately released the video above, announced an anti-trust lawsuit, and started a social media and PR campaign.

And by the way, Epic planned this from the start [1].

I know what you’re thinking. Why would Epic voluntarily get its app banned from the App Store, losing millions of users?

It all makes sense, I promise.

But for that, you need to understand the two players.

Player 1: Epic Games

Epic Games has been going at Apple for a while, regarding the App Store monopoly.

See here, for instance, Tim Sweeney (CEO of Epic Games) comparing Apple to the DMV.

Tencent owns 40% of Epic Games. Having a Chinese company as a significant owner is not an amazing situation to be in, in the US today.

To learn more about Epic Games and its strategy, check out Matthew Ball’s epic (well) six-part primer.

Player 2: Apple

Apple has significant share of the mobile phone market in the US (~60% of mobile phones in the US are iPhones).

It’s embroiled in an anti-trust battle with the US government.

It has a history of arm-twisting and bullying smaller companies. For instance, if your company’s logo is a fruit, even if it’s not an apple, Apple can make your dreams go pear-shaped.

Do these two logos look similar to you? To Apple, they do.

Epic is not the first company at loggerheads with Apple regarding the 30% commission. Netflix and Spotify, among others, have stopped selling subscriptions on the App Store altogether. You can use Spotify and Netflix on iPhones. But if you want to pay for them, you have to visit their websites.

OKAY. Enough talk, let’s get on with the game.


The game begins. Ready Player Two.

Apple has pre-committed to removing an app from the App Store if it tries to bypass its rules. No matter how important the app is.

Given this pre-commitment, Apple had no choice when Epic tried to bypass it with its “sneaky” update.

In a sense, Epic forced Apple’s hand by doing this. It forced Apple to appear aggressive by banning its app. Even though it was the only move Apple could plausibly make.

Epic was already engaged in a PR battle with Apple (accompanied no doubt by closed-door negotiations). Apple wasn’t budging.

Epic could have continued the battle of attrition. But instead, by forcing Apple to carry out its threat, it has constrained the gamespace.

It has made it much harder for Apple to now offer only a symbolic olive branch.

But again, why would Epic want to get its app banned, losing millions of users?

Fact is, as Peter Rojas says in this interview, this is not a exorbitantly expensive threat for Epic to make. Only 20% of Fortnite players are primarily on mobile.

And this number is likely to grow over time, making it harder for Epic to take this approach in the future.

Ergo, the best time to do this was yesterday. The second best time is NOW.

Like Denzel Washington says,

Training Day Denzel Washington GIF - TrainingDay DenzelWashington …

Game Theory Sidebar 1:

Threats and commitments are important tools in strategic games and negotiations.

To quote Thomas Schelling in The Strategy of Conflict [2]:
“The sophisticated negotiator may find it difficult to seem as obstinate as a truly obstinate man. Deterrence won’t work for the truly obstinate.

It’s very easy to keep demanding during a negotiation, because you (a) will always accept less, than not having a deal, and (b) you can always retreat if they don’t accept. But the other side knows this too, so it’s an impasse.

If a man comes to your porch and says he’ll stab himself if you don’t give him $10, you’re more likely to listen if his eyes are bloodshot.

“Bargaining power = the power to bind oneself”.

It’s a voluntary but irreversible sacrifice of freedom of choice, to signal that you can’t retreat from a certain ask.”

If you commit to a path of action, the opposite party has lost all leverage”

Epic just stole Apple’s lunch. And leverage.

The Middle Game

Epic is trying to rally developers to its side. It’s trying to paint the battle as a David vs. Goliath struggle. The meek, tiny developer taking on the formidable bully.

But it’s unlikely to work, for two reasons:

  • Epic is a huge company itself (valued at USD 17 billion), backed by Tencent, a USD 600 billion behemoth. This is like Godzilla fighting King Kong. We don’t care, except the fast-paced action is fun to watch.
  • Small developers might actually prefer the App Store [3], because it gives them a semblance of a level playing field. Consumers trust all apps on the App Store, because they know Apple has vetted and approved them. So, even if you’re a small developer, customers don’t worry about giving you their credit card details. Trust is important!

Epic will no doubt also play up the anti-trust / monopoly angle.

It will ask, “Should one company have so much control on mobile users’ choices?” This line of attack has more promise, as we’ll see in the end game.

Apple, for its part, is trying to tell consumers it’s no big deal (it is).

Image

Before we go to the endgame, a quick interlude.

Game Theory Sidebar 2:

Quoting again from The Strategy of Conflict:

In a negotiation, if you ask for 60% and then go down to 50%, you will be expected to dig your heels in. And so the counter-party will push less. If you say 47%, they’ll assume that you can give up more and will push until you find another persuasive new boundary.

In war, similarly, one cannot satisfy an aggressor by letting him have a few square miles on this side of a boundary. He knows that we both know that we both expect our side to retreat until we find some persuasive new boundary that can be rationalized.

That’s also why “just one more drink” is a very unstable compromise.

Some outcomes have intrinsic magnetism. Outcomes that are prominent, unique, simple, or have a precedent / logic, drive agreement towards them. Often, this eventual compromise point can be predicted in advance.

For example, in a price negotiation: rounding down, splitting the difference, etc. are explicit expectations of counter-offer. And you often have no choice but to follow this drill. Even if you had strong prior reasons to quote 51.5% as your first offer.

These focal points / likely outcomes are called “schelling points”.

Framing the situation in a way that coordinates expectations of the opposite party towards your favored outcome – this schelling point – can multiply the probability of success.


So what’s the “schelling point” of this battle between Apple and Epic Games? Let’s see in the end game.

The End Game

I see three possible outcomes from this impasse.

Outcome 1: Apple gives in and waives the commission for certain in-app purchases.

There is a sort of precedent for this.

McDonald’s doesn’t pay a commission on every in-app purchase of food. Neither does Uber, on every ride booked through the app.

But there’s an important distinction. Food purchases and cab rides have a very real marginal cost of fulfillment.

What about virtual currencies? Not so much. 1000 V-bucks on Fortnite cost Epic exactly zero real bucks to make.

And this is an outcome Apple really does not want.

If they allow this once, the floodgates will open. Every app will move to an in-app purchase model, and frame it in exactly the same way as Epic Games has.

And even Apple accepts this as a special deal with Epic Games, it sets a dangerous precedent. Because Microsoft xCloud and Google Stadia (cloud gaming services) will come next.

No, this is not a hill that Apple wants to die on.

Luckily for Apple, this is also not a position Epic games can defend.

As Ben Evans says,

Moreover, the App store is not all eye-gouging profiteering. It does provide a service, and that does costs money.

  • Users like it – it allows them to trust new apps from unknown developers.
  • Developers like it too, for the same reason. It gives them a level playing field.

Putting it all together:

Probability of Outcome 1: 10%.


Outcome 2: Apple reduces its commission and everyone wins.

Again, this makes sense at a high level.

Apple’s 30% has no basis in logic. Steve Jobs chose 30% because it was the same as iTunes.

What! Let’s get this straight. In 2003, iTunes decided to charge artists 30% of individual song sales. That’s the only reason why the totally unrelated App Store charges 30% for apps!

There is clearly room to go down. And push comes to shove, Apple would be ready to reduce the commission. After all, it already has different slabs of commission for different kinds of products.

Maybe it can reduce it to a new schelling point. 25%? 20%?

However, this is not what Epic wants. They want to pay zero percent commission to Apple.

To Epic, the stand is philosophical. And while this may be a coincidence – it’s also more lucrative ?.

  • Today, mobile accounts for only 20% of Fortnite users. Epic can afford to reject any sweeteners and fight for the grand prize. Better to fight now, rather than later when the downside of a ban is higher.
  • And there’s an even grander prize waiting. Epic has its own app store (not allowed on iOS yet), where it charges other games a commission of 12%. Seeing how successful Apple’s App Store is, that’s a lucrative business to be in.

So yes, a commission reduction will happen. Apple will make a peace offering. It may even lead to a tenuous peace.

But it won’t end the negotiations. Epic will hold out for Outcome 3.

Probability of Outcome 2: 30%.


Outcome 3: Apple allows other app stores.

This is what the App Store is, to iPhone users. The only bridge crossing into town.

A user cannot download an app to the iPhone from outside the App Store. Android has alternate app stores and also allows you to directly install apps. iPhone does not.

The analogy of the toll bridge is one that trust-busters and anti-monopolists like to use. It came up in antitrust investigations when Buffett acquired the Buffalo Evening News in 1977. And it will come up for Apple.

This is where Apple’s position is weakest, and this is where Epic is hitting it.

As M. G. Siegler says in “The App Store Commandments“, maintaining an “only bridge to the iPhone” approach made sense in 2010. But it’s not acceptable anymore.

This is what Epic is gunning for. Breaking the Apple App Store’s monopoly on the iPhone, and introducing its own Epic app store.

Epic could have held out for a reduction in fees (Outcome 2). It could have negotiated a win-win closed door deal (Outcome 1). But no.

By forcing Apple to ban its app, Epic has bent reality through a new focal point – the inability to reach users if Apple aggressively bans an app.

This then, is the long-term schelling point – alternate app stores for iPhone.

It may take one year. It may take two. It will be fought hotly by Apple, before it capitulates.

All it’ll take is one bad Congressional anti-trust hearing. And then, Apple will look at Android. It’ll see that even though Google allows other app stores, its Play Store still accounts for a huge majority of Android app downloads[4].

It will reason that developers will still prefer the Apple App Store, if only because there will be much fewer users on other app stores.

Probability of Outcome 3: 60%.


And that’s how Apple will finally get a second app store. And a third. And a fourth.

All it takes is one big bite.


Hope you liked the article. If you’d like to receive more such articles directly in your inbox, don’t forget to subscribe to Sunday Reads!


Footnotes:

[1] Read more details in this article from the Verge: “The company behind Fortnite dared Apple to shutter its game on iPhones. Now Apple has gone ahead and sort of done that.

[2] The Strategy of Conflict is a great book on applying Game Theory to the real world. It’s unfortunately not available on Kindle. Don’t worry if you can’t access a physical copy – there are PDFs of the book that you can find on Google.

[3] I said the App Store is more pro-developer than less. But of course, we haven’t heard Tim Cook chant chant “Developers… Developers…” like this guy.

[4] Except in China, where Google Play is banned.

Speed as a competitive advantage

speed

A lot of discussion on startup and business strategy ultimately comes down to one single piece of advice.

“Build a moat”.

Yes, increasing margins is important. Yes, solving distribution is critical. But before you do all that, you need to build a “moat”.

What’s a moat? Like medieval castles, a moat for your business protects you from competitors and substitutes. It gives you market power, so you can focus on growth, profitability, and all the good stuff.

For many investors, it is the most important thing.

Take Warren Buffett, for example.

As as the VC firm Andreessen Horowitz says, in Moats Before (Gross) Margins:

Yes, gross margins are important. But over-rotating on gross margins is myopic because business quality is driven by more than margins.

Business quality is about defensibility. Defensibility comes from moats.

Now, there are a few standard types of moats in business. If you look at the most successful companies, you invariably see some (or all) of them.

Regulations. Technology / IP. Brand. Economies of Scale. Network Effects.

Jerry Neumann has categorized them very well, in A taxonomy of moats:

image
Source: A Taxonomy of Moats, Jerry Neumann

But what if you have none of these moats yet?

Turns out, you can generate a moat out of thin air, by simply being fast. By hustling.

Yes, speed can be a lasting competitive advantage.

In fact, as per Elon Musk, it may be THE lasting competitive advantage.

Says the man who’s started four multi-billion dollar companies:

The most important sustainable competitive advantage is fostering an organizational culture that supports a higher pace of innovation.

And if you want something more tweetable:

The fastest company in any market will win. That’s why companies need to make speed a habit.

Dave McClure of 500 Startups has a great presentation, on speed as the primary business strategy

The presentation has some great examples of companies that succeeded with relentless focus on speed.

  • Stylus Innovation – $13M exit in two years.
  • Direct Hit – $500M exit in 500 days.
  • Xfire – $110M in 2 years.

The presentation also has some concrete tips on how you can be faster. Whether it’s fundraising, hiring, employee onboarding, or business development, you can be much faster.

[As you think of ways to speed up, it also helps to remember, your Minimum Viable Product can be more minimum than you think.]

We’re running at top speed here. Can’t go any faster!

Sometimes, you think it’s impossible for your organization to be any faster than it already is. If you go any faster, you’re sure things will break.

At such times, check out Patrick Collison’s list of examples of unbelievable speed. It’s called… Fast.

Some examples from the article:

  • The Eiffel Tower was built in 793 days.
  • On August 9 1968, NASA decided that Apollo 8 should go to the moon. It launched on December 21 1968, 134 days later.
  • The iPod shipped within 290 days of getting started.
  • Amazon started to implement the first version of Amazon Prime in late 2004. It went live on February 2 2005, six weeks later (!).

To be fair, when it comes to speed, Amazon SMOKES every other company.

Speed is a competitive advantage in your career too.

As James Somers says in Speed matters: Why working quickly is more important than it seems;

Systems which eat items quickly are fed more items.

Slow systems starve.

This is true at a simple level, of course.

The faster you do things, the more things you can do. The more intelligent bets you can place. And so, the more you can win.

But it’s also a superpower that makes you indispensable. The more things you take on, the more critical you become to your organization.


PS. I will add more examples and actionable tactics to this post soon.

PPS. Speaking of unlikely moats, sometimes, good old focus can be a competitive advantage too.


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How dumb are these Nigerian princes! Or are they?

Have you ever received an email from a Nigerian prince, going somewhat as follows?

Nigerian prince email

I’ve received a bunch of these over the years.

It’s a standard template. Someone in Nigeria or Congo or Dubai, is dying or is dead. They have several million dollars that they want you to help safekeep. They need you to make a small payment first for some ridiculous reason.

Would you fall for an email like this? Of course not. Come on, this is 2020! No one would fall for it.

But “Nigerian prince” email scams still rake in over USD 700,000 a year – and that’s from the US alone.

Well, you say, you didn’t mean no one. Of course there are some clueless people around. And 700K is not an astronomical sum.

In fact, if the scamsters could make their email even a little more plausible (a small business owner in the Mid West instead of a West African prince, for example), more people might fall for it?

And while we’re on the topic – we should also correct the spelling mistakes. Seriously, why do scamsters always make so many spelling mistakes! Even in subject lines!

Yes, these “Nigerian prince” emails could be more polished and plausible. But making them less plausible is precisely the point.

Hold that thought.

Yes, these “Nigerian prince” emails could be more polished and plausible. But making them less plausible is precisely the point.

Marketers & Hungry Crowds

The #1 principle of Direct Marketing is – Qualify the funnel.

As Gary Halbert (“history’s greatest copywriter”) says in The Boron Letters:

One of the questions I like to ask my students is, “If you and I both owned a hamburger stand and we were in a contest to see who would sell the most hamburgers, what advantages would you most like to have on your side?”

Some people say they would like to have the advantage of having superior meat from which to make their hamburgers. Others say they want sesame seed buns. Others mention location. Someone usually wants to be able to offer the lowest prices. And so on.

After my students are finished telling what advantages they would most like to have, I say to them: “OK, I’ll give you every single advantage you asked for. I, myself, only want one advantage and, if you will give it to me, I will whip the pants off of all of you when it comes to selling burgers!”

“What advantage do you want?”, they ask.

“The only advantage I want, ” I reply, “is a STARVING CROWD!”

If you’ve found a starving customer, you don’t need much else to close the sale.

Find rotten eggs early

One of the key lessons from High Output Management is this:

Material becomes more valuable as it moves through the production process. So, fix any problems at the lowest value stage.

To quote from the book:

All production flows have a basic characteristic: material becomes more valuable as it moves through the process. A boiled egg is more valuable than a raw one… A college graduate to whom we are ready to extend an employment offer is more valuable to us than the college student we meet on campus for the first time.

A common rule we should always try to heed is to detect and fix any problem in a production process at the lowest value stage possible.

Thus, we should find and reject the rotten egg as it’s being delivered from our supplier, rather than permitting the customer to find it. Likewise, if we can decide that we don’t want a college candidate at the time of the campus interview rather than during a plant visit, we save the cost of the trip and the time of both the candidate and the interviewers.

Let’s say you run an apparel factory. If the input cloth you received has quality defects, when would you rather find out? When the shirt is ready, or before the shirt goes into production?

Or you run a SaaS business. If your prospect is going to drop off the funnel next week, wouldn’t you rather find out today? Instead of after inviting them to an online workshop, doing a 1-1 free consulting call, and mailing them three times?

Or let’s say you have your team working on a complicated analysis. If they are making a basic assumption that’s wrong, would you like to find out once the analysis is complete? Or would you rather align at the start, and save a lot of time?

Catch errors early. If an egg is rotten, find out before you scramble it.

That’s why it’s always a Nigerian prince.

It’s easy to send that first email to thousands of people.

The next steps are more labor-intensive. A person has to talk to the target, persuade them to wire money, and cajole them to jump through other assorted hoops.

Labor = costly.

Wouldn’t it be nice if there was a way to spend time only on the most qualified customers (i.e., the most gullible targets)?

In fact, as the original research paper from Microsoft says:

Far-fetched tales of West African riches strike most as comical. Our analysis suggests that is an advantage to the attacker, not a disadvantage. Since his attack has a low density of victims the Nigerian scammer has an over-riding need to reduce false positives. By sending an email that repels all but the most gullible the scammer gets the most promising marks to self-select, and tilts the true to false positive ratio in his favor.

That’s why phishing emails have spelling mistakes.

To self-qualify the funnel.

It’s not that the phishers struggle with English. That would be funny if it were true. Masterful confidence tricksters, but struggle to put together rudimentary sentences.

No, they speak English fine. It’s just that they don’t want people with high attention to detail to click on the link. If you notice such minutiae as spelling errors, then you’d notice other more suspicious details later and stop responding anyway.

They want only gullible prospects, with the least attention to detail.

They want to have a high percentage of such people pass through the next steps of the funnel. Share their passwords in a mindless fog. Click on executable links as an afterthought. Download Trojans in utter oblivion.

Phishing emails deliberately have spelling mistakes. So that only less-attentive people click through.

Fascinating. So is there a lesson in all this?

Yes, three in fact.

Lesson 1 – qualify your funnel as early as you can. And if possible, create a way for your audience to self-qualify. Don’t do sales calls with every visitor who stumbles across your website and shares their email. Instead, make them do the work of qualifying themselves. Have them join a webinar or download two white papers (both have zero marginal cost to you), before you do the hard pitch.

Lesson 2: Catch errors early. If your team is working on a complex analysis, first agree on the basic assumptions and logical flow. If it’s an investor presentation for next week, agree on the key messages and storyline today.

Lesson 3: Don’t click on emails from Nigerian princes.

Four things Apple’s slow slide teaches us about business strategy

From a quick dipstick I did last week, I’d guess a good chunk of my readers use a Macbook, and even more use an iPhone. I think it’s fair to say: Most of us are Apple fans.

So, it’s concerning to see the company meandering over the last few years. Lackluster product launches, even more lackluster products. Even Siri seems dumb now.

 

Is Apple losing the plot?

Smart folks are really worried about Apple.

apple-slow-slide

Apple’s slow slide illustrates four key principles of business strategy:

1. The S-Curve of Company Growth: Any successful company inevitably goes through a life-cycle of stuttering beginnings, rapid growth, and then gentle maturation – an S-curve. This has been true both in the Internet era and before, as Ben Evans illustrates in The best is the last. Apple is no different. Apple may be the next Microsoft.

 

2. Limited Window of Optionality: There is a way to prolong your growth arc, though. Keep transforming your business, when your previous product is succeeding, and the wind is at your back. Jobs leveraged this limited window of optionality successfully, with the iPod, then the iPhone, and then the iPad. Larry Ellison did it at Oracle too.

But Tim Cook hasn’t been able to lead such pivots at all.

Why?

 

3. The Visionary Leader – Executor Follower Conundrum: Steve Jobs was a visionary (duh). And he built a strong team of executors around him, to implement his vision. So, guess who succeeded him? A superb executor, but short on vision. Tim Cook is great at delivering on an existing strategy, but he just hasn’t kept pace with a fast-changing world.

[The similarity with Microsoft shows here too. It’s the same reason Bill Gates chose Steve Ballmer as his successor. With similar effects.]

 

4. The Jobs-to-be-done Framework: There’s another interpretation of Tim Cook’s non-success. And it comes from Clayton Christensen’s second big theory – jobs-to-be-done. As he says, consumers buy products that complete specific jobs for them.

“People don’t buy quarter-inch drills, they buy quarter-inch holes.”

The job-to-be-done is quite clear with the iPod, the iPhone, and the iPad. But Apple is struggling to find jobs for the Apple Watch and Apple Pay.

 

So, plenty of problems for Tim Cook. But maybe, just maybe, we’re all wrong about this and a major pivot is coming.