Co-Opetition - Adam M. Brandenburger [64]
The examples of Comfort Class, Taco Bell, and Marks & Spencer all involve minimal trade-offs. At a small cost, TWA engineered a big improvement in quality. Likewise, for a small reduction in quality, Taco Bell and Marks & Spencer engineered large cost savings. Ideally, the trade-off should be as small as possible. The least trade-off is to make no trade-off at all.
Trade-Ons
While trade-offs are one way to engineer added value, even better is when you end up with higher quality and lower costs at the same time. This outcome is what we call a trade-on. Do trade-ons exist? Absolutely. Think of the quality revolution. People learned that redesigning the manufacturing process—rather than reworking defective items—led to quality improvements and cost savings at the same time. They found that high quality is low cost.
Establishing a virtuous circle is another route to creating trade-ons. You make a better product. At first, your costs rise by more than the perceived quality improvement. But if you can hang on, more customers will come to you. With larger volumes you can operate more efficiently. The quality-cost trade-off begins to work in your favor. Now you’re earning more money than at the outset. You can invest some more in product improvement, lower price, or do both. You get still more customers and still greater efficiencies. The virtuous circle is rolling. With enough scale, your costs might even be lower than at the outset. You’ve turned a trade-off into a trade-on.
In the current debate over protecting the environment, it’s often said that there are inescapable trade-offs. It’s possible to have cleaner and greener products, but only in return for accepting lower quality or higher costs. Not so. It’s possible to have environmental trade-ons, as documented by Harvard Business School professor Michael Porter and his coauthor, Claas van der Linde, a management professor at Switzerland’s St. Gallen University. They point to the case of the Dutch tulip business.19 To reduce contamination of soil and groundwater, the Dutch have moved cultivation of tulips from outdoors to advanced greenhouses, where pesticides and fertilizers are now recirculated in a closed system. The controlled environment also reduces infestation risk, allowing growers to further economize on pesticides and fertilizers. Moving indoors, growers have found a new way to plant tulips, which has helped lower handling costs. Finally, the greenhouses reduce variability in growing conditions, improving product quality. The Dutch tulip growers have managed to protect the environment and enhance their added value at the same time.
Discovering trade-ons is not just an engineering job. There are opportunities everywhere, if you go out and look for them. Dedicated authors that we are, we understand the need to do field research—which brings us to Club Med.20
Getting into Bed with the Customer While no one’s asking for any sympathy, it’s hard work being on the staff at Club Med. The day starts with breakfast at 7:15 and often goes well past midnight, playing late-night basketball, bartending, or rehearsing skits for the next evening’s performance. Staff members need to speak several languages and work a six-day week. And yet Club Med pays its staff—the gentils organisateurs—significantly less than the market wage for multilingual college graduates. Labor costs, as a percent of sales, are around ten points below the hotel industry average.
Does that mean Club Med gets third-rate employees? Not at all. Turnover and growth create 2,000 openings a year, for which there are over 35,000 applicants. Club Med attracts people for whom money isn’t a priority. Only those who really love the Club Med experience apply for the job. Club Med even recruits staff from its guest list, resulting in a staff that is a whole lot like the clientele. So everyone gets along.
By economizing on labor costs, Club Med ends up enhancing its appeal to customers. A trade-on.
Club Med also keeps costs