Idea In Brief The Challenge To create a really successful business, you have to turn conventional business wisdom on its head. But how do you know which rules to break? The Approach Smart companies solve big structural problems endemic to their industries. In breaking those bottlenecks, they significantly reduce their costs. The Strategies Companies can break bottlenecks in five key ways: Update the customer experience Eliminate superfluous expense categories Neutralize customers’ financial risk Re-engage employees Mitigate environmental or ethical side effects If you want to create a successful business, you have to do more than win your share of customers or control costs—you have to break the rules and overturn the received wisdom about how things work. Consider the airline industry. High-priced landing fees are just a cost of doing business, right? Ryanair didn’t think so. It turned Europe’s unused World War II landing strips into very low cost airports. To be a cell phone service provider, you need to invest in towers, networks, billing systems, and more, don’t you? India’s Airtel said no and leased virtually everything it needed from others. In sharply lowering its costs and improving its working capital model, Airtel was able to offer India’s impoverished consumers cell phone service at a dramatically reduced price. So how can companies figure out what rules to break? Over the past five years, we have worked with more than 50 small and midsize companies that have managed to set “business as usual” to one side and solve big structural problems endemic to their industries, not just problems they alone face. In breaking those bottlenecks, they significantly reduced their costs—in some cases eliminating entire cost categories—or boosted demand levels, and sometimes both. On the basis of our research and our work with these companies, we found that just about every “not business as usual” innovation was effective because it broke one of five types of bottlenecks: (1) an outdated purchase or usage experience, (2) a superfluous major expense category, (3) significant financial risks for customers, (4) disengaged or demotivated employees, and (5) detrimental side effects of the product or service. In the following pages, we’ll discuss each of these bottlenecks and how to break them by describing the experiences of five companies. Bonobos: Retailoring the Customer Experience In many cases a bottleneck begins life as a seemingly unavoidable and, from the customer’s perspective, unpleasant or frustrating way of doing business. But very often companies can use advances in technology to eliminate the outdated practice and bust the bottleneck. Try Before You Buy Online “We thought we could do away with the whole idea of a ‘shopping experience,’ since most men aren’t interested.” Andy Dunn, Bonobos founder ( Financial Times, 2009) Until quite recently, buying clothes was an experience that hadn’t changed in over a century. Most people went to shops where they tried to find a pair of trousers, say, that they liked and that fit. The process often involved visiting multiple shops and trying on clothes at each one. Rich people had the option of having trousers made for them, but that was expensive, labor-intensive, and almost as time-consuming. Entrepreneur Andy Dunn saw an opportunity to remove the frustration through an online shopping solution, especially for men. Launched in 2007, retailer Bonobos, named after the great ape species, initially provided better-fitting jeans and trousers targeted to younger consumers (who were more willing to try online solutions) at a moderate price. In 2011, following four years of rapid growth, Dunn identified yet another customer experience bottleneck. Many men were reluctant to order pants online, having learned from lifelong brick-and-mortar experience that pants often don’t fit. “No sense in ordering if I’ll just have to return them,” they concluded. This insight led to a new concept, the Guideshop. Now with 17 locations in major cities from New York to San Francisco, Guideshop showcases its merchandise in small spaces that hold a full array of sizes and styles for trying on but offer nothing for sale on-site. Thus it eliminates the supply chain requirements that brick-and-mortar retailers face while addressing the “try before you buy” challenge that plagues online retailers. Guideshops have no inventory to manage, racks to stock, or cash registers to staff. Customers make an appointment, and when they visit they are treated to personalized, private service; typically there are no more than two or three customers in the store at a time, each with his own guide. No products are purchased at the stores. Instead, a guide aids the customer in placing an online order, and retains the customer’s information to streamline future purchases and service. Industries with long-standing customer experience formats are quite likely to have bottlenecks. Customers become used to formats and don’t question them—and if they don’t complain, it’s unlikely that incumbent companies will recognize a problem. Innovators should look for some aspect of the customer experience that discourages demand for all firms in your industry (like having to stand at a curb to hail a taxi, which Uber eliminates). Map the customer buying experience in a flow chart, step by step, and then ask, “Can we eliminate one or more of the steps?” Steps that are often repeated (like going from store to store in search of trousers that fit) are particularly fruitful candidates for elimination. Redbox: Axing the Cost Category Many industry bottlenecks develop because companies don’t question whether customers really want all the features of a particular product or service. What happens is that a first mover achieves success with a particular offering, and its model gets established as the way to do business. The customer is happy because the advantages outweigh any disadvantages, the industry accepts the cost of the entire offering, and a bottleneck is born. Companies that take a second look at their industry’s cost structure will often find ways to gain advantage. Redbox, the automated video rental company, is a case in point. In the late 1990s, Blockbuster adopted a revenue-sharing model with movie companies that allowed it to open stores all over the world with large selections of videos. Competitors soon followed suit. And because going to a video store was the only way customers could rent the films they wanted to see, people flocked to the stores. No one questioned the assumption that this was the best way to provide the offering. But in 2002, the new-venture unit of fast-food giant McDonald’s was looking for ideas that could drive additional traffic to the company’s restaurants. “They were also looking for a worldwide product outside of the food sector,” McDonald’s venture team leader at the time, Gregg Kaplan, told Self-Service World magazine in 2007. A concept for renting DVDs from a vending machine looked promising. Kaplan and his team began experimenting with location, pricing, and DVD selection, eventually settling on a robotic kiosk to be located outside McDonald’s stores. The no-membership-fee format priced DVD rentals at a dollar a day, far below the then-prevalent pricing at Blockbuster and others. Why could Redbox rent DVDs for less than the industry leaders? It was easy, really. Redbox required no on-site staff (payroll expense, gone) and virtually no location costs (rent, utilities, and more, gone, too). Its kiosks cost only $15,000 and took up just 12 square feet, compared with a couple of thousand or more square feet for a typical Blockbuster store. Redbox, with Kaplan as its CEO, grew at an astonishing pace, becoming the fifth-largest movie rental company in the United States by the end of 2007. By 2009, its more than 15,000 locations had taken 19% of the market, leaving 36% for rent-by-mail operators like Netflix and 45% for traditional stores. In July 2013, Redbox rented its three billionth disc, from an assortment that by then incorporated movies and video games. It reckoned that some 68% of the American population lived within a five-minute drive of a Redbox kiosk. To tackle the cost bottleneck, first comb through your industry’s financial statements. Focus on any large cost category that’s common to all firms and consider ways to make a dent in it or eliminate it entirely. Pose some what-if questions: If we’re not going to use physical stores to rent videos, how will we reach our customers? What will our customers be losing and gaining as a consequence? To get ideas, look at other industries that sell products in different ways. Vending kiosks were not new, but using them to rent and return items was. Hyundai: Eliminating Customer Risk In many industries, customers routinely take on significant financial risks when buying a product. Most people, for example, can’t afford to buy a car outright and have to take out a loan to finance the deal. But this exposes them to risk, because in order to make the payments, they need to have a steady income for many years. In a strong economy, people feel confident in their ability to make payments and are happy to bear the risk. But what if they lose that confidence, as they did in the Great Recession? Conquer Fear “The idea of giving people the option to give the car back if they were struggling…seemed a great way to make customers comfortable and increase our market share in an economy like this.” Joel Ewanick, former VP of marketing, Hyundai Motor America ( Advertising Age, 2009) By the fourth quarter of 2008, the U.S. auto industry was in a tailspin. Industry sales were down by 35%; Hyundai sales had fallen even more. “This is a recession of fear,” Joel Ewanick, then-VP of marketing at Hyundai Motor America, told Advertising Age. So the company came up with an innovation that removed fear from the equation. On February 1, 2009, Hyundai offered consumers a unique deal, in an ad aired during the Super Bowl. “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.” The carmaker then aired the ad nine times during the Academy Awards (spots given up by the financially ailing General Motors) the following month. The buyback guarantee brought sales increases of 8% in 2009 and 24% in 2010. Better yet, Hyundai had to buy back only 350 cars. If you are in an industry whose products or services represent a major financial commitment for your customers, ask whether you are better positioned than they are to bear that risk. In Hyundai’s case, the consequences of taking back a car were less severe to the company than the consequences of defaulting on a loan were to an individual—who would not only lose a means of transport but also would take a hit on his or her credit rating. Of course, a new pricing model is relatively easy for competitors to copy, so the advantage is not that sustainable. But it may allow enough time for your product to prove its merits with users who might not otherwise have considered it. Appletree Answers: Motivating the Workforce Some industry bottlenecks stem from unquestioned assumptions about how to manage and motivate employees. In late 2008, Appletree Answers, a provider of call center services, had a 110% employee turnover rate. Although that was low by industry standards, CEO John Ratliff estimated that at a cost of $5,000 per turnover, Appletree had a $2.2 million problem—a huge burden for a company generating revenue of just $16 million a year. Ratliff’s team came up with 50 ideas about how to reduce employee turnover. The one the group settled on was Dream On, a concept borrowed from the Make-A-Wish Foundation. Frontline employees were invited to submit “dreams” to the executive team, with the promise that some would be chosen and fulfilled. But four weeks after announcing the Dream On initiative in their numerous call centers, not a single request had been submitted. Ratliff and his team members were stumped, but they soon discovered that the employees didn’t believe the executive team was serious. “They didn’t want to look stupid in front of their peers,” Ratliff told one of us (Ersek). “They didn’t think it was real.” Two weeks later, after more outreach efforts, Ratliff finally had his first submission. It 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,” said Ratliff. This employee’s dream was an apartment in which to raise her children. “We were all over it!” Appletree paid her first and last months’ rent and security deposit for the apartment, and purchased more than $1,000 worth of furniture. The company even promised her landlord that if the employee were to fall behind in payments, Appletree would help. Ratliff vividly remembers what happened next. “She wasn’t obligated to announce what the dream was. It’s totally confidential. But she said, ‘Not talk about it? I’ll tell anyone who listens that it’s the greatest thing that ever happened to me.’” Dream On quickly spread, and Ratliff was soon receiving dozens of dream requests. Over a period of four years, at a total cost of about $400,000, the company granted some 275 of them. Appletree Answers was included on Inc. magazine’s list of the fastest-growing U.S. companies for seven consecutive years, and staff turnover decreased from 110% in 2008 to 30% in 2012. A more engaged staff led to decreased customer attrition and made a positive impact on gross margin, which increased from 47% in 2008 to 60% in 2012. Companies are often very good at developing creative ways to engage with and delight their customers. They tend to be less willing to experiment with new ways of motivating their employees. Salaries, bonuses, and occasionally recognition and prizes are the tools of choice. But by focusing on better hiring and retention, companies can transform the economics of its business just as surely as it can by improving sales. Appletree’s $400,000 investment in employee satisfaction and loyalty really paid off. Identifying such bottlenecks involves better understanding the tough problems employees face at work and home—problems that are typically very different from those of top managers. Patagonia: Saving the Planet Many industries create products that generate side effects (what economists call “negative externalities”) that are not felt directly by the consumer. Farmers may use fertilizer that damages the water table, for example, but until the chemical compromises the water they will actually use or consume, it is very easy for them to ignore that effect. Many industries matured at a time when pollution and other side effects went relatively unnoticed or were routinely ignored, and managers and customers in those industries continue to overlook the possibility of creating value by eliminating them. When such change does occur, it’s often driven by the passion of an individual or by necessity. Do No Harm “Build the best product, cause no unnecessary harm, use business to inspire and implement solutions to the environmental crisis.” Patagonia’s mission statement Yvon Chouinard, founder of the apparel company Patagonia, is one such individual. He believes he can build a profitable business while being a good steward of the environment—and that in doing so he can influence other companies to be more environmentally conscientious as well. Historically, increasing demand for cotton apparel had motivated farmers to use chemical pesticides and fertilizers to speed growth of crops and increase yield. The result has been a larger and better-priced supply of cotton and consequently more output of cotton apparel at cheaper prices. The unintended consequence, or negative externality, has been the deterioration of soil and water and health threats to those who live or work nearby. Patagonia found an alternative approach in the Texas Organic Cotton Marketing Cooperative. Chouinard saw the potential benefit of a product that did not involve the use of damaging chemicals. By using organic fabrics, Patagonia could provide a superior, highly differentiated product that would appeal to a growing segment of the market. In 1994, he mandated that Patagonia use only organic cotton, and he began building a sound business model around the use of higher-quality, more environmentally conscious materials. Sales of its cotton clothing quickly jumped by 25%, despite the higher cost. This and other environmentally oriented initiatives have struck a chord with Patagonia’s fiercely loyal consumers, enabling the company to grow at a rapid pace, more than tripling its revenue from 2001 to 2013. Eliminating harmful side effects from a product can be a powerful source of competitive advantage if enough customers are willing to switch to the new offering. The success of ethical labeling—on products such as dolphin-safe tuna—testifies to growing consumer awareness of negative environmental and social externalities. Although these concerns are most pressing in consumer products markets, they are becoming increasingly important in business-to-business environments, too. The scope for gaining competitive advantage by changing a product’s composition or by creating a cleaner supply chain will continue to grow. What’s more, we’ve observed that pro-environmental strategies, like Patagonia’s, are seldom widely copied. Any T-shirt maker could switch to organic cotton, of course. But most have not, which enables Patagonia to enjoy a clear competitive differentiator, better gross margins, and a sustainable advantage in serving a market segment it loves. Isn’t that what most companies hope to achieve? Of course, identifying your industry’s bottlenecks—let alone fixing them—isn’t easy. It’s particularly hard for market leaders, who are often heavily invested in the status quo. Those companies compete by being better at what everyone is currently doing—their goal is incrementally improvement. They’re less likely to step back and pose existential questions of the sort we’ve discussed here. This is not to say that change can’t come from within an industry. Innovators like John Ratliff of Appletree Answers and CEO Michael O’Leary of Ryanair call on personal experiences that reveal the waste, inconvenience, risk, employee disengagement, or environmental and social degradation their industry is causing. Why not ask questions today rather than wait for that experience to hit?

Barrett Ersek

Eileen Weisenbach Keller

John Mullins

<article-ideainbrief class="article-ideainbrief">
 <h4 class="ideainbrief-title">Idea In Brief</h4>
 <div class="ideainbrief-contents">
  <h5>The Challenge</h5>
  <p>To create a really successful business, you have to turn conventional business wisdom on its head. But how do you know which rules to break?</p>
  <h5>The Approach</h5>
  <p>Smart companies solve big structural problems endemic to their industries. In breaking those bottlenecks, they significantly reduce their costs.</p>
  <h5>The Strategies</h5>
  <p>Companies can break bottlenecks in five key ways:</p>
  <ul>
   <li>Update the customer experience</li>
   <li>Eliminate superfluous expense categories</li>
   <li>Neutralize customers’ financial risk</li>
   <li>Re-engage employees</li>
   <li>Mitigate environmental or ethical side effects</li>
  </ul>
 </div>
</article-ideainbrief><p>If you want to create a successful business, you have to do more than win your share of customers or control costs—you have to break the rules and overturn the received wisdom about how things work.</p>

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<p>If you want to create a really successful business, you have to do more than win your share of customers or control costs&#8212;you have to break the rules and overturn the received wisdom about how things work in your industry.</p>
<p>For example, high-priced landing fees are just a cost of business in the airline industry, aren&#8217;t they? Ryanair didn&#8217;t think so, and it turned Europe&#8217;s unused World War II landing strips into very low cost airports. To be a cell phone service provider, you need to invest in towers, networks, billing systems, and more, right? India&#8217;s Airtel said no and leased virtually everything it needed from others. In sharply lowering its costs and improving its working capital model, Airtel was able to offer India&#8217;s impoverished consumers cell phone service at a dramatically reduced price.</p>
<p>How can companies figure out which rules to break in their industries? By focusing on big structural problems endemic to their industries&#8212;not just problems they alone face.</p>
<p>There are five common types of industry bottlenecks: (1) an outdated purchase or usage experience, (2) a superfluous major expense category, (3) high financial risks for customers, (4) disengaged employees, and (5) detrimental side effects of the product or service.</p>
<p>This article lays out strategies used by real companies for busting those bottlenecks. In doing so, companies stand to significantly reduce their costs&#8212;or even eliminate entire cost categories&#8212;boost demand levels, and sometimes both.</p>
<p class="reprint">HBR Reprint R1507H</p>

Break Your Industry&rsquo;s Bottlenecks

If you want to create a really successful business, you have to do more than win your share of customers or control costs—you have to break the rules and overturn the received wisdom about how things work in your industry. For example, high-priced landing fees are just a cost of business in the airline industry, aren’t they? Ryanair didn’t think so, and it turned Europe’s unused World War II landing strips into very low cost airports. To be a cell phone service provider, you need to invest in towers, networks, billing systems, and more, right? India’s Airtel said no and leased virtually everything it needed from others. In sharply lowering its costs and improving its working capital model, Airtel was able to offer India’s impoverished consumers cell phone service at a dramatically reduced price. How can companies figure out which rules to break in their industries? By focusing on big structural problems endemic to their industries—not just problems they alone face. There are five common types of industry bottlenecks: (1) an outdated purchase or usage experience, (2) a superfluous major expense category, (3) high financial risks for customers, (4) disengaged employees, and (5) detrimental side effects of the product or service. This article lays out strategies used by real companies for busting those bottlenecks. In doing so, companies stand to significantly reduce their costs—or even eliminate entire cost categories—boost demand levels, and sometimes both. HBR Reprint R1507H

Break Your Industry’s Bottlenecks

Summary.

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