Tuesday, November 08, 2005

The Right Problem

In the late 1970s, when I was studying for my MBA at Northwestern’s Kellogg School of Management, I took course in Channels of Distribution, taught by Lou Stern. At the time, Lou (now retired) was considered the world’s leading expert on channels (the marketing process necessary to get goods and services from manufacturers to final consumers, and the entities (“members”) through which the goods and services change hands on their way to the consumer.)

Case studies were all the rage in the 1970s, and Kellogg was no exception. The Channels class included a case study on Volkswagen of America that took place in the early 70s. Volkswagen’s sales were down and their relations with dealers were very poor. Their dealers were usually located in undesirable locations, and their facilities were poorly maintained. What, asked Lou, had to be changed in Volkswagen’s relationships with dealers for the company to again be successful?

I’d shopped for a Volkswagen during the period covered by the case study, so I had personal experience with the problems with VW dealers. However, it was very clear to me that the problems with the channel had nothing to do with Volkswagen’s real problems; in fact, the dealer problems were merely a symptom.

In the early 70s, VW’s product line consisted of the Beetle, Sedan, Wagon, Karmann Ghia and Bus. VW defined the US economy car market in the 1960s, but by the time of the case study, both the look and technology of their cars was dated, and their quality, which had once been superb, was in decline. At the same time, Toyota and Datsun had entered the market with cars that were better-looking, more powerful, better engineered and higher quality than VW’s, at lower prices.

Given a choice between VWs and cars that cost less and were superior in just about every way, consumers did the only sensible thing: They stopped buying VWs. Volkswagen’s market share plummeted. VW dealers’ revenues dropped through the floor. They didn’t have enough money to maintain their dealerships, move to better locations, or advertise.

What would have happened if VW had fixed all its channel problems? Loaned their dealers money to clean up their buildings or move to better locations? Pumped more money into local advertising? Improved their relationships with the dealers? None of that would have fixed much for very long, because the real problem was Volkswagen’s products, not their channel of distribution. The cleanest, most modern dealerships still couldn’t sell crappy cars.

In my report on the case study, I said all of that (in more words, of course, since length counted.) Lou wasn’t impressed. He gave me a C+. Lou was wrong, which leads us to:

Rule #1: You have to know what the real problem is in order to fix it.

Far too many organizations solve the wrong problem. McDonald’s was struggling while other fast food chains were growing. To turn the company around, they tried a bunch of things: They added playgrounds to their restaurants to attract more families, dumbed down their cash registers to compensate for their huge employment attrition rate (at one point McDonald’s was turning over almost its entire workforce every year,) and cleaned up the restaurants. They launched McRib sandwiches and hamburgers with artificial beef made with seaweed. They completely redesigned their sandwich production process to speed up delivery and make sandwiches fresh for every order. They experimented with cafes attached to their restaurants (McCafes) in cities with Starbucks on every corner.

What happened? Their sales continued to drop. McDonald’s solved many problems, except the core one: Their food. The core menu was old, and the beef patties had no more flavor than the buns. The seaweed beef substitute tasted like cardboard. Even switching to a healthier oil used for frying French fries backfired: The new fries didn’t taste as good as the ones fried with the fattier oil, so McDonald’s had to switch back to the original formula..

While McDonald’s was adding playgrounds, cleaning the restaurants, speeding up delivery, etc., their focus, energy and resources were diverted from fixing the core problem. It’s only in the last 18 months that McDonald’s has focused on its food. They’ve launched a family of chicken sandwiches that are both healthier than hamburgers and taste good. They’ve worked hard to improve the flavor and quality of its hamburgers. They’re starting to replace their coffee (known for being very hot but not very good) with a much better coffee made from Fair Trade beans.

McDonald’s sales are trending up for the first time in several years, because they’re finally getting the food right.  If McDonald’s had been fully focused on improving their food instead of playgrounds and production processes, they would have turned the company around years earlier. Even if they tried and failed repeatedly to get the food right, they would have committed the resources and effort necessary to eventually solve the problem. Which leads us to:

Corollary #1: Doing a great job of fixing the wrong problem can often be worse than doing a bad job of fixing the right problem.

Focusing on the wrong problem diverts the resources necessary to fix the real problem. During the Jacques Nasser regime at Ford, he fired most of the senior managers who knew anything about making and selling cars, made a huge investment in Internet marketing, bought Volvo, Land Rover, Jaguar, Aston Martin and operating control of Mazda, then bought junk yards and went on the record saying that his goal was to get Ford’s revenues from cars and trucks down to less than 50% of the total. In other words, he fixed everything but the real problem: Ford’s own vehicles were mediocre at best. Quality was poor and designs were unappealing.

You can’t fix the problem of not selling enough cars by selling fewer cars. Hence, Bill Ford allowed Nasser to spend more time with his family, and took over running the company. Ford hasn’t done a great job of running the company either, but at least he has the company focused on the real problem: Improving the design and quality of its cars and trucks.

In the car business, there’s virtually no problem that can’t be solved with better products. However, I don’t mean to infer that products are always the problem. For example, Jones Soda has great products, but their sales potential is limited by a dearth of local distributors that are both strong and unencumbered by exclusive distribution deals with companies like Coca-Cola and Pepsi. That’s a channel problem. Making their cherry soda taste better is great, but it doesn’t get it into more stores.

My point is simple: In order to fix the real problem, you have to know and focus on what the real problem is.
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