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False Assumptions
May 06, 2008
Excerpted From: Rules to Break & Laws to Follow
By Don Peppers and Martha Rogers
The year is 1886. Gottlieb Daimler has just unhooked the horses from the front of a stagecoach and installed an engine in the back. He has created the first automobile. But it's noisy, smelly and smoky—mostly an oddity.
Daimler met Karl Benz a few years later and the two men went into business together. Then, early in the 1900s, financial planners at the new Daimler Benz automobile manufacturing company attempted to forecast the eventual size of the world market for cars, looking ahead 100 years. After careful analysis, they predicted that in another century there would be perhaps one million cars in use worldwide.
But this forecast, as audacious as it must have sounded at the time, was woefully inadequate, because by the year 2005 more than 700 million cars were already in use worldwide. More than 60 million new cars were manufactured in that year alone.
Granted, this was a very long-term forecast, but still: How could Daimler's finance people have missed the number by a factor of nearly 1,000? It wasn't the time lapse that accounts for the error. Nor was it sloppy calculation, or the fact that in those days they had no electronic calculators or spreadsheet programs. Their error was due to a completely false assumption.
The planners predicted that in 100 years the world population of chauffeurs would be about a million, and this would be a de facto limitation on the growth of the horseless carriage industry. Their prediction about the world population of chauffeurs was surprisingly close to the mark, but their assumption that all cars would have to be operated by chauffeurs was dead wrong. The error was not in the accuracy of the measurement, but in a false assumption about what they measured.
Assumptions just like this one—just as carefully and accurately measured and every bit as fallacious—are every day corroding decisions about what truly limits the growth of businesses. Maybe yours.
Like Bell forecasting that the market for telephones would be limited by the availability of human operators to make the connections, or IBM's Tom Watson famously predicting that the world would never need more than about five large computers, it's not hard to be blinded by the current business model. Even when the model is for a brand new product category.
For most of a century now, three unspoken assumptions have underpinned businesses' efforts to grow, meet financial goals and make shareholders happy. But these three assumptions about how a business creates value are false, and we call them "Rules to Break."
1. The best measure of success for your business is current sales and profit.
2. With the right sales and marketing effort, you can always get more customers.
3. Company value is created by offering differentiated products and services.
Questions Every Business Needs to Answer
To re-examine the false assumptions that seem to have governed business for so long, we will have to look carefully at some very basic issues. You can't come up with a new mental model for how to run your business today unless you can answer several questions:
How do companies create value? Start with the simple and undeniable fact that every minute of every day, your company is going up or down in value. We're not talking about your stock value here, but about your company's actual economic value as a business (i.e., how a perfectly efficient stock market would value your business if it really did know everything there was to know about it). Your business creates or destroys value with every decision it makes, every action it takes, every customer contact or interaction it has.
The kind of value logged in your financial statements has to do with sales made, or revenue received, or costs incurred. But more often, value is created or destroyed when, as a result of some decision or action you take, the overall value of your company as a financial asset goes up or down. For instance, when a customer's complaint is not handled well, your actual value as a company declines just a bit, because the expected future cash flow from that customer declines.
Until recently, it just hasn't been technologically feasible to track or project these small changes in the value of a company, and from our experience the financial metrics are still pretty difficult. But it's no longer impossible, and the point is that even as a purely mental construct this idea has some extremely important implications for how you manage your business.
Why do customers have more power? People around the world are talking, blogging, texting, e-mailing, posting and networking more than ever before, and in the future everyone will become even more connected to everyone else.
One small aspect of this technologically-enabled social development is that your customers now find it much easier to connect with other customers and share their opinions about your firm.
You have to think about the customer's friends, co-workers, family members and anyone the customer has on speed-dial—the customer's social network. But guess what? Networks aren't as rational as people are, and are prone to highly unpredictable behavior.
How can you use the network and your corporate culture to make better decisions? As the entire world has become more cost-efficiently interconnected, most businesses (probably including yours) have begun relying on interactivity to run their operations more smoothly.
Employees e-mailing other employees, rather than phoning; invoices delivered electronically; orders submitted on the Web; business travel booked online; meetings held in self-service, password-protected conference calls; proposals, business plans and other lengthy documents composed in sections and assembled effortlessly, without so much as a shuffled file folder.
Many businesses have thinned out and flattened their organization charts, automating or outsourcing the vast majority of more routine business tasks that used to be handled by full-time employees.
But while companies for the most part have used interactivity as a mechanism for streamlining and cost-cutting, the cleverer ones have also begun using it as a way to improve management decision-making, as well. Sociologists have long known that a group of people organized toward a common goal (like a company's employees) are capable of making decisions better than any single group member could have made—better even than the sum of all the members' individual efforts. Employees electronically networked together can leverage this decision-making advantage, and can easily come up with smarter decisions than all the "experts" at the top of the hierarchy. But it's tricky, because while networked employees may be capable of making better decisions, it's still the managers at the top of the hierarchy who have all the authority.
How do you stimulate more and better innovation? It's not your imagination. The pace of change itself is accelerating, which means that creativity and innovation are more critical to your company's survival than ever before. Your organization must not only exploit its current opportunities fully, but constantly explore for more, as well. No matter how innovative or interesting your product or service is today, tomorrow it will be a commodity. And tomorrow comes faster now than it used to.
This content is excerpted from Rules to Break & Laws to Follow: How Your Business Can Beat the Crisis of Short-Termism, February 2008 by Don Peppers and Martha Rogers, Ph.D., with permission from the publisher, John Wiley & Sons. You may not make any other use, or authorize any others to make any other use of this excerpt, in any print or non-print format, including electronic or multimedia.
Sales & Marketing Management Magazine
This article is brought to you by Sales & Marketing Management, the leading authority for executives in the sales and marketing field.
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