There are two schools of thought about how information should flow within companies. By far the most common way is chain of command, which means that you always flow communication through your manager. The problem with this approach is that, while it serves to enhance the power of the manager, it fails to serve the company.
Instead of a problem getting solved quickly, where a person in one dept talks to a person in another dept and makes the right thing happen, people are forced to talk to their manager who talks to their manager who talks to the manager in the other dept who talks to someone on his team. Then the info has to flow back the other way again. This is incredibly dumb. Any manager who allows this to happen, let alone encourages it, will soon find themselves working at another company. No kidding.
Anyone at Tesla can and should email/talk to anyone else according to what they think is the fastest way to solve a problem for the benefit of the whole company. You can talk to your manager’s manager without his permission, you can talk directly to a VP in another dept, you can talk to me, you can talk to anyone without anyone else’s permission. Moreover, you should consider yourself obligated to do so until the right thing happens. The point here is not random chitchat, but rather ensuring that we execute ultra-fast and well. We obviously cannot compete with the big car companies in size, so we must do so with intelligence and agility.
One final point is that managers should work hard to ensure that they are not creating silos within the company that create an us vs. them mentality or impede communication in any way. This is unfortunately a natural tendency and needs to be actively fought. How can it possibly help Tesla for depts to erect barriers between themselves or see their success as relative within the company instead of collective? We are all in the same boat. Always view yourself as working for the good of the company and never your dept.
There are sooo many great points in this email. Let’s break them down:
500 Startups, one of the world’s leading startup accelerators, recently released a report on how large companies can best work with startups. Given their unique position in the market, 500 Startups surveyed executives at companies like General Motors, Simon Ventures, Embraer, and more to learn what they’re doing to drive collaboration with startups.
The 500 Startups Corporate report has tons of useful takeaways for both startups and corporate innovation teams. Here are their best practices for corporate innovation teams and my take below:
“Get good grades in school. You’ll have more options when choosing a college.” -Parents
“Pick a major that applies to many different industries. That way you’ll have more job options.” -College Counselor
“Consulting is a great field. From there, you can do whatever you want.” -Career Advisor
While this advice isn’t necessarily wrong, very rarely do we take a step back and examine what exactly we’re collecting all these options for. Perhaps at the beginning of our careers, we have some vague idea of a goal or accomplishment we want to reach but we’re not quite sure: a) how to reach the goal and b) if we even want to reach the goal in the first place. So naturally we choose the path that keeps the maximum number of future possibilities available to us. Unfortunately, this fuzzy goal mindset is often carried through to adulthood and leaves us grasping for optionality with all of our major life decisions. And over the course of a lifetime, this optionality maximization mentality turns us into habitual option collectors and prevents us from reaching our goals.
But I’m getting ahead of myself. Let’s start with the basics.
I recently had the pleasure of joining Nat Eliason on his podcast ‘Nat Chat’ to discuss Antifragile by Nassim Taleb, which if you don’t know, is one of my all-time favorite books. During the podcast, Nat gave an example of a “naive intervention” that’s been percolating in my mind ever since: In response to children being distracted in class, doctors have, for years, been liberally prescribing Ritalin to “help” students focus. Instead of examining and redesigning the distractions and flawed class structure that leads to almost 20% of American boys being diagnosed with ADHD, the education and medical industries have decided to drug students into submission. And this naive intervention leads to long-term issues, as there seems to be a link between taking Ritalin and cocaine addiction later in life, due to the similarity between the two drugs. Nat referred to this overprescription trend as “trying to fix the terrain, instead of fixing your map”, the terrain in this case being children and their attention span while the map is the solution to capturing their attention.
To put it more broadly, your map is yourmodel of the world while the terrain is the actual world. Models are always, always, always (I can’t stress this enough) an approximation of reality. When models are effective, there is very little difference between the model and reality. When models fail, there’s a large difference. And because the world is constantly changing, models require continual feedback loops and updates to remain effective. Changing the model is much more in your control than changing reality, yet many notable screw-ups (like the ADHD example above) happen when humans try to re-shape reality instead of re-shape their model.
This terrain/map concept is so powerful and broadly applicable. Through the work I do, I see a ton of parallels with both corporate innovators and startups trying to force the landscape to adapt to their expectations instead of adjusting their solutions to the new reality.
Retail: Legacy Brands vs Adaptive Brands
In retail, the vast majority of legacy brands still base their strategy on a terrain that existed pre-Internet and pre-social media: namely, the supply-driven retail business model. Spotting these companies is fairly simple: they are the ones who are late to the game on almost every trend. Why? Because trends now emerge organically through “the public” (sometimes influencers but often just the dregs of the interwebz) instead of through corporate tastemakers.
The old model for retail was for a buyer or tastemaker to decide which products would be released in a given season. These buyers were/are extremely skilled at understanding consumer preferences and the model worked well for a long time. But now that we’re able to access products from around the world, taste has simply become too complex for any single human being (or in my opinion, an algorithm alone) to control or predict. Instead of a top down model of tastemaking, trends now generally emerge from the vast pool of humanity, without an easily determined reason – though people will try (and fail) to analyze trends in hindsight.
Brands that have embraced this new model (like Zara) are able to identify emerging trends through rapid piloting, kick the design and supply chain processes into action for successful experiments, and get products in-store before the trend has really taken off. Equally important, they can economically halt the process and respond to the next trend when the current one is over. Brands that have built processes like this to adapt to the new retail environment are exemplifying the idea of “fixing their map” to adapt to the new terrain.
Startup Sales Process
Likewise, over the years, I’ve seen plenty of startups miscalculate just how long and involved the enterprise sales process is, how many stakeholders there are, and the risks involved when a large company works with a small one. The startups who successfully navigate this process are the ones who, often through trial and error, develop an accurate model for the organization they’re selling to. This includes knowing who the key decision-makers are, what they are being judged on, what their top priorities are, and most importantly, how your startup fits into the picture.
The startups who get frustrated in this process are usually those who come into it with unrealistic expectations of how quickly a deal will get done, simply because of how much sense it makes…on paper. While mapping a deal on paper is important, it isn’t nearly enough to move things along.
To successfully close a deal with a large company, it takes an understanding of who in the company is actually buying your product, what that person or department is tasked with, what they’re succeeding and failing at, and so much more. All of this deep, detailed knowledge can only be gathered through research and many interactions with the target company. And this knowledge is then used to build and iterate on your map (i.e. model) for how to get the deal done.
But if a startup runs into a wall during the sales process and attempts to change the procurement process (i.e. change the terrain) – good luck. Those processes were likely created by a painstaking process involving dozens of people and months of debate. Most importantly, you – a little startup – don’t have the leverage to demand that the large company change their process. If the startup has a ton of leverage, it’s possible (though unlikely) that the large company may volunteer to fast-track the deal. But I have never seen a startup successfully demand that the large company change their process.
When things aren’t going right or are more difficult than expected, it’s easy to look externally and blame outside forces. But more often than not, it’s our model that’s flawed, driven by expectations which don’t match the reality of the terrain. Taking a step back and evaluating our map is often all we need to do to correct things. An even better tactic is to build in opportunities to check and adjust your map as you go along, for example interacting with customers often to continuously test your assumptions. These feedback loops are the only way to make sure the map you’re using is an accurate representation of the terrain and not a forced fit “solution” that has little connection to reality.
Confession: 8 Mile is one of my favorite movies. That’s not only because I’m a huge hip-hop fan. The gritty Detroit scenes, the classic hero’s journey, the great acting, and yes, the rap battles all play their part in making 8 Mile one of the movies I turn to when it feels like life is beating me down.
In addition to being such an inspiring and entertaining film, the final scene features a major lesson to be learned for anyone trying to sell. For those who haven’t seen the movie (or if you just want to see some great rap battles), start by watching the video below:
Prior to the above final scene, Jimmy Smith Jr. (played by Eminem) constantly has his physical and personal characteristics thrown in his face as insults, the most immutable being the fact that he’s white in a neighborhood that’s mostly black. On top of that, he and his friends aren’t known for being gang members or drug dealers and are simply people who have regular, low wage jobs at an automotive plant. For the majority of the movie, Smith feels defeated by the constant attacks on something he can’t change. The turning point comes when he realizes that his perceived weaknesses can be turned into his strengths, especially if framed the right way. Nowhere is this seen more strongly than in the final battle:
This guy ain’t no motherf***ing MC, I know everything he’s got to say against me, I am white, I am a f***ing bum, I do live in a trailer with my mom, My boy Future is an Uncle Tom. I do got a dumb friend named Cheddar Bob Who shoots himself in his leg with his own gun, I did get jumped by all 6 of you chumps
One of the things that shows skill when freestyling is being able to come up with creative insults. When someone calls out everything you’re about to say, how in the world can you respond? Their self-deprecation takes all the responses right out of your mouth and leaves you gasping for air.
Sales Pitch Objections
The preempting insult strategy from 8 Mile always reminds me of something I love to hear in sales pitches. Startup founders and salespeople have heard every objection in the book. Things like:
Your company is too small
You’re too young
The product isn’t “polished”
You don’t have enough customers
Most salespeople will do their best to brush over the perceived weaknesses of their product. They certainly won’t be bringing up their product’s weaknesses as part of their pitch.
However, none of the above common objections is insurmountable and can actually be turned into advantages. For example, a way to pre-empt the “you don’t have enough customers” objection is to say that you’re currently working with a select group of invite-only early adopter clients. And we all know everyone wants to be part of an invite-only club. The “your company is too small” objection can be reframed by saying you have a small, agile team that can respond to customer requests more quickly than any large company ever could. You get the picture.
I’ve even seen some companies include some of these common objections in their pitch decks or as part of an FAQ section of their website. This is the ultimate show of confidence and highly recommended if you know your responses are going to be powerful.
Ultimately, whether you make a sale or not is highly dependent on how you respond to objections and questions. Every product and company has strengths and weaknesses. Those that try to gloss over the weaknesses and only highlight their strengths run the risk of being perceived as shady or dishonest. But a company that shows you what it’s weaknesses are AND is able to re-frame those weaknesses as strengths? That’s who you want to work with.
I’ve been going through the Jocko Podcast archives over the past few months. While listening to Episode 47, one of the listener questions really got my attention. The listener asked Jocko if he did anything ritualistic to get himself mentally prepared before his Navy Seal operations. Pretty innocent question and one that I’d imagine many listeners have thought about.
“I hate to spoil the romantic vision of the mindful warrior poet but that actually, that idea is just not what happens. Here’s the reality: first and foremost, when you’re in combat and preparing for an operation – you are freakin’ busy…there’s so much planning and preparation that needs to be done…you’re not just sitting around trying to figure out your mindset.
That being said, mindset IS a part of combat. So how did I get in the right mission mindset? Well the mindset is not achieved in the minutes or even hours before an operation, from chanting a mantra, or breathing, or meditation, or some song that will get you in touch with your warrior spirit. The mindset is achieved in the weeks, and the months, and the years BEFORE that specific operation commences.
We lived in the mindset and that mindset came from the training we went through, the repetition of the fundamental skill sets. The mindset comes from the discipline – waking up early, studying the tactics, understanding the enemy – from all those unmitigated daily disciplines”.
That is such a powerful answer, and one that any large company hoping to innovate should pay extra attention to. Before I dive into this further, a quick disclaimer: Yes, I fully understand that corporate innovation is orders of magnitude more trivial than war.
The Wrong Type of Innovation Culture
That being said (to borrow a classic Jocko phrase), there are SO many companies that think “innovation” can be learned in a single workshop or can be siloed into a department which will invigorate the rest of the company. You see this all over the place. Everyone seems to be looking for a shortcut and there’s no shortage of charlatans trying to sell it to them.
And when companies try to shortcut their way to innovation and fail, they wonder what went wrong. Let me say this unequivocally: things didn’t go wrong because you picked Outlook over Gmail, or because you chose to go to Tel Aviv for your innovation trip instead of San Francisco. It wasn’t because you picked the wrong innovation workshop vendor, or because you don’t have an open office plan.
This focus on appearances and shortcuts is just another symptom of the “innovation theater” mindset. Innovation theater refers to companies (and people) who optimize for the appearance of being innovative instead of actually being innovative.
Without a doubt, innovation in large companies fails because of company culture. So what can leaders do to make their culture more innovative?
Instead of trying to workshop innovation, companies need to build a questioning and experimentation mentality into their company culture. This starts with incentives – both positive and negative. Employees need to have some air cover from their superiors to question the status quo and try new things. In most organizations, a failed project can scar your career for life. This type of massive negative risk disincentive is a great way to ensure that employees never try new things. Getting rid of disincentives (or at least reducing the magnitude of the downside) is a good way for companies to get out of their own way.
But it can’t stop there. Employees also need some positive incentives for developing new businesses. Creating new things with proper incentives is hard enough – imagine having to do it in an environment where your best case scenario is earning a year-end plaque? Creating upside – both financial and prestige-based (early promotions, recognition, and more) – is crucial.
How Do You Spend Your Time?
Too often in large companies, employees spend the entire day running from meeting to meeting, with little time to breathe and collect their thoughts or do any “actual” work. This is no way to innovate. Creating new concepts, even non-disruptive ones, is grounded in thought and experimentation. Twenty person meetings typically have very little to do with it.
Google’s famous “20% Time” policy allows (or arguably, used to allow) employees to spend up to 20% of their time on side projects. This policy was responsible for the creation of Gmail, Adsense, and Google News, products which created or disrupted their categories. The biggest advantage to encouraging employees to start these side projects is that companies enjoy a risk-reward ratio that is massively in their favor. If a concept fails, barely any money or time was spent on it. If it succeeds, well, the results of Gmail speak for themselves. This is exactly that kind of low risk, high reward investment that professional investors hunt for all their lives.
While 20% time may or may not be directly applicable to your company’s situation, managers should be more comfortable giving employees leeway to experiment with new concepts. You never know what your company’s Gmail will be.
Added bonus: employees will feel more empowered and engaged, which usually leads to less turnover!
There’s no workshop, partnership, or class that will magically turn a stale company into an agile machine. Creating an effective innovation culture requires months and years of foresight, proper incentives, and vigilance against the innovation theater mindset. And to paraphrase Jocko, an innovation culture is built through unmitigated daily disciplines, not shortcuts.
Last week, I had the opportunity to give a talk on product innovation at the Fashion Institute of Design & Merchandising (FIDM). While I think they called me in to share some of the things I’ve learned during my time consulting to The Estee Lauder Companies, it’s hard to say who got more value out of the talk: the students or me.
I’ve switched industries a lot in my (admittedly) short career. Over the past few years, I’ve worked in higher education, early education, ad tech SaaS, cosmetics, and alcohol. Because of that frequent switching, I’ve often been a beginner and forced to get up to speed in new industries quickly. However, during the Q&A portion of the talk at FIDM, I realized I had stopped looking at the cosmetics industry through a beginner’s eyes. The students (all of whom were about 20 years old) were asking questions about the industry, sales channels, and technology from angles I had never thought of but seemed obvious as soon as they brought them up.
For example: among millennials, beauty influencers have huge power to drive sales, simply by recommending a product or featuring it in a makeup tutorial video. Several students brought up the (valid) point of diminishing consumer trust in influencers because of all the undisclosed sponsored posts. In hindsight, this concern seems obvious but in all my time working with beauty brands, this point has either been completely avoided or jokingly brushed off. Yet these students were able to very easily see the long-term consequences of the current influencer trend: diminished consumer trust. Instead of working with influencers or celebrities, these students were interested in figuring out how to build better peer-to-peer recommendation systems that start and end with product effectiveness in a personalized way and can’t be gamed by larger brands. Amazing concept!
What surprised me the most about the FIDM Q&A session is how unaware I was of losing my “beginner’s mind“. I’ve only been in the beauty industry for two and a half years – which is nothing if you compare it to colleagues who’ve been doing this for twenty or thirty years. But those two years were more than enough to make me miss obvious concerns with the current trendy marketing strategy. This brings up an important question: at what point do people lose their “beginner’s mind” and is it possible to keep this creative state of mind for longer periods of time?
At this point, I don’t quite know what the best solution is but I suspect it has something to do with continually exposing yourself to others without much experience and limiting your interactions with so-called “experts”. While I’m sure there’s some value in having deep knowledge within a specific field, it certainly does seem like the more time you spend working on a given problem, the more difficult it is to see the tangential opportunities that might be obvious to a beginner.
I’ll be exploring this beginner/expert dichotomy further in future posts but in the meantime, let me know your thoughts or experiences with the beginner’s mind on Twitter or in the comments!
For the typical early stage startup, closing a deal with a Fortune 500 company can provide a huge boost in morale and momentum (and hopefully cash). Enterprise deals are a signal for investors to indicate traction, a common source of free media attention, and a key factor when potential employees will weigh your offer against other opportunities.
Over the past several years, I’ve sat on the corporate side in my role building the External Innovation group at The Estee Lauder Companies, where I’ve worked on 200+ deals with startups of all sizes. Before that, I sat on the startup side of the table and led growth at several venture-backed companies; closing enterprise deals with companies like Proctor & Gamble, LinkedIn, Spotify, and Honda.
With this dual background, I’ve seen (and made) my fair share of mistakes in building startup-corporate interactions. Avoiding the mistakes below just might be the difference between celebrating a deal with a new enterprise customer and sitting on the sidelines wondering what happened. To paraphrase the classic sales quote from Glengarry Glen Ross: champagne is for closers.
Mistake #1: Assuming Large Companies Have Limitless Cash
Yes, you may be pitching to a billion-dollar company but the person you’re pitching to doesn’t have a billion-dollar budget. While corporate budgets may (keyword: may) have more wiggle room than startup budgets, your corporate counterparts are still dealing with many demands on a limited budget. On top of day-to-day budget concerns, large companies, even successful ones, may implement spending freezes for specific departments. It’s entirely possible that your potential customer will be comparing your product with something in a completely different industry, simply because you’re competing for the same budget dollars. Have some empathy for the budget concerns of your corporate counterparts and it’ll pay off by differentiating you from other salespeople they encounter.
Mistake #2: Trivializing Deep Corporate Knowledge
While it is possible that your startup is “changing the world”, the Fortune 500 companies you’re pitching to have already changed the world and know a thing or two about how things work. There’s nothing more annoying to your corporate counterpart than trivializing the deep knowledge they have of their industry. You can also run the risk of shooting yourself in the foot by extrapolating current trends in your presentation. Do you really think you’re the first person to tell a corporate innovation director with twenty years of experience that artificial intelligence is going to take over every industry by 2030? Whether you’re right or not, the point is they’ve heard that story before and may view it as a sign of arrogance. Showing some humility and using phrases like ‘our hypothesis’ go a long way towards establishing your honesty and credibility.
Mistake #3: Using Too Much Startup Jargon
True story: the first time I mentioned the word “accelerator” in a corporate R&D lab I was consulting for, a senior scientist gave me a confused look and said he “didn’t realize particle accelerators were funding startups now”. While this may initially make you facepalm, it was a great reminder that those of us in “startup world” truly live in a bubble that most of America, and the world, are not part of. Taking the startup jargon down a notch will help you get your point across.
It sounds cliché but knowing your audience is the key to effective communication. When pitching to individuals who’ve spent their entire careers in large companies, avoid using startup words that they won’t understand and connect with. It’s not the job of the audience to figure out the presenter – but it is the job of the salesperson to make sure their pitch isn’t going over the audience’s head.
Mistake #4: Ignoring Implementation Costs
In the omnichannel world we live in, any large company with a physical retail presence is constantly pitched new in-store technology concepts. While the startups offering these technologies are charging reasonable prices (often as low as $30/location/month), what is often ignored is the cost a company must incur to implement a new technology. For example, a technology that provides customer intelligence via iPad to in-store sales staff so they can sell better requires an extensive training program, troubleshooting, and potentially even in-store hardware upgrades. So even though a technology like this may only cost a total of $6,000 per month (200 locations x $30/location/month), the implementation costs (for things like hardware and training) across 200 locations could easily exceed $100,000.
Implementation costs are difficult to avoid entirely but there are steps startups can take to help their clients reduce costs and get themselves closer to signing a deal. These steps include negotiating reduced hardware pricing with manufacturers, assisting with or even providing free training, and offering to troubleshoot software issues for sales staff. Whatever you do, the important thing is to make it feasible and simple for the large company to say yes to working with you – and that doesn’t always involve the price of your actual product.
Once you’re able to snag a meeting with a decision-maker at a large company, it means you’ve got their attention. They are interested (albeit at a very high level) in what your product can do. That said, these decision-makers are looking at dozens of other companies who are competing for the same budget. The easiest thing for a decision-maker to do is say no and any of the mistakes above give them an easy out. By always keeping your audience in mind, being empathetic to their concerns, and avoiding critical mistakes, your probability of closing a deal goes way up. And that’s ultimately the outcome that both large companies and startup salespeople are after.
The other day, I was looking to buy a jump rope I could travel with. After spending (wasting?) about 30 minutes going through jump ropes on Amazon caused by searching for “best MMA jump rope”, I paused to ask a highly relevant question: what in the world was wrong with me? Why did I need “the best” jump rope? The previous jump rope I owned came from who knows where and served me fine for a long, long time. The experience felt like living my own version of Aziz Ansari’s piece about trying to find the best toothbrush.
Last week, I had a great lunch conversation with my friend Lexi Lewtan (currently building AngelList’s A-List job platform) about something similar she was noticing in the recruiting industry. Companies all wanted to recruit “the best” iOS engineer or designer for their company even though that bar is subjective based on what that company is building. No one, not even early stage startups, wanted to settle for hiring an average engineer, even if that meant huge cost savings and would get the job done perfectly well.
We’re taught in economics, entrepreneurship, and statistics classes to assume that most things lie on a normally distributed curve. This is especially true about demand – at some prices, I’d like to buy a “widget” while at higher prices, I wouldn’t.
Essentially, the post boils down to the world moving from one of scarcity to one of abundance and that leading to a breakdown of the normal distribution curve:
To build on Alex’s great post, I think we’re moving to an even greater dichotomy. We’re going to live in a world where companies AND people are either luxuries OR commodities. This trend is showing up in industries as varied as cosmetics, labor, food, and much more. Let’s start with some definitions; what’s the difference between a commodity or a luxury in this context?
Commodity: A product or service for which I’m brand agnostic and highly price sensitive, usually because I believe there is no major difference in quality between brands OR it’s just something I don’t really care about. Examples (for me): gas stations, drug stores, bottled water, socks, paper towels…the list goes on.
Luxury/Premium/Prestige: These are products or services for which I’m highly brand/review sensitive and minimally price sensitive. Things in this category for me include coffee, beer, shoes, cell phone, computer, chocolate, and many, many more. The luxury/premium/prestige category is the one where you would search for “the best” on Google or Amazon.
One key thing to remember is that the determination of a commodity or a luxury is an individual thing – for example, some people think all beer tastes the same and treat it as a commodity. I think differently and am willing to pay a huge premium for beer that I think tastes better, uses more valuable/rare ingredients, and has a better story behind its creation.
The easiest way to test whether something is a luxury or commodity for you is to imagine the price of product X increased by 10%. Would you still buy it or would you switch brands? For example, for most people, if a cup of Starbucks coffee increased from $2.50 to $2.75, they wouldn’t think twice about continuing to buy Starbucks. Similarly, if the price of a 15 inch Macbook Pro went up from $1,999 to $2,299, most Macbook Pro customers would still buy it (although probably with some complaining).
Let’s look at how the luxury vs commodity trend is affecting three very different industries:
I’ve been spending much of my time studying the cosmetics industry because of my work at The Estee Lauder Companies. Since my role is to look externally, I’ve been watching how companies position themselves and how they’re adapting to this new luxury-commodity dichotomy.
For beauty brands, there isn’t much room left in the middle – either you’re making commodities that are competing on price (in which case, your gameplan should be to cut costs as much as humanly possible and sell at grocery stores and drug stores) or you’re competing on uniqueness and luxury, in which case you need some product, marketing, or service elements that stands out.
If you think about labor in a “prestige” vs “mass-market” manner, you see a similar thing happening. Companies look to hire world class full-time employees for a select few key positions and for everyone else, they’re OK working with outside firms or freelancers. This makes sense from their perspective: why invest additional overhead for average talent when you can replace it easily with the next person who walks in the door?
This trend is part of the reason we’ve seen marketplaces for unskilled labor pop up everywhere over the past few years – not just Uber, but also Fancy Hands, Handy, Wonder, and much more. The people working for these companies are all contractors, which is a much cheaper arrangement for companies than hiring full-time, allows flexibility for workers, and allows companies to adapt dynamically to demand in the marketplace (Uber’s surge pricing is the best known example of this).
On the other side of the unskilled labor marketplaces, highly skilled individuals in certain industries have seen their salaries climb higher and higher as firms bid for their talent. This can be seen on a wide scale by looking at software developer salaries or the long-term rise in CEO pay at Fortune 500 companies. As much as it would be fun to complain that these pay issues are all about corporate greed (which is certainly a factor for the CEO pay issue), at the end of the day, it’s really about companies bidding against each other for talent that they want to acquire or keep at all costs – aka the luxury talent.
Food & Beverage
Believe it or not, there was a time when coffee was a commodity item. For those of us who’ve grown up in the era of the $5+ latte, the commodity coffee era is a difficult world to imagine. I assure you, however, a world in which coffee consisted of hardly drinkable sludge that cost $0.50 was a very real place.
The late 80s and early 90s featured the rise of a company called Starbucks. You may have heard of them. The key distinctive trait of Starbucks was taking a commodity item that no one thought much about and elevating it to a level no other coffee retailer had imagined or done on such a large scale.
What does the word elevating mean? In this context, elevating coffee meant Starbucks started with higher quality beans than any of their existing competitors (luxury), roasted them with a more precise science than their competitors (luxury), integrated the story of Italy, espresso bars, and the Third Place (luxury), and included an ethical component (luxury). Compare that to a gas station that would pour some black sludge in a styrofoam cup and sell it to you for $0.50 (commodity). All of these elements factor into giving Starbucks the cache to sell a commodity product as an affordable luxury for almost 10x what their competitors were selling at. Howard Shultz (the man behind Starbucks) tells the full story behind the commodity to luxury rise in detail in his book Pour Your Heart Into It: How Starbucks Built a Company One Cup at a Time.
Today, the rest of the food & beverage industry is doing its best to try to break out of the world of commodity items. Whether they do or not remains to be seen but the tide has turned in luxury’s favor as more and more people are paying attention to the ingredients in their food. This creates an opportunity for brands to elevate (there’s that word again) healthy ingredients, the lack of preservatives, ethical sourcing, freshness, or dozens of other desirable food characteristics.
Commodity vs Luxury: The Way Forward
The main, short-term outcome of this commodity vs luxury transition is that companies are going to be forced to make decisions about how to invest in their futures. My guess is that more companies are going to invest in building brands that are luxuries. Why? Because a luxury’s key differentiator is uniqueness – which could come from a unique ingredient, a novel process, or a fascinating background story – any and all of which can be sustainable competitive advantages.
Building a commodity business seems to me as an outsider to be a lot more difficult. Commodity businesses would be competing mainly on price which makes it easy to imagine commodity businesses becoming a race to the bottom with margins getting slimmer and slimmer until there are no profits to be made. Commodity businesses survive on high volumes and while of course there will always be a (huge) market for them, I think we’re moving to a world where people will buy a higher percentage of products at a premium that last longer, work better, and are more unique – which by necessity means purchase volume will go down. This trend could also be tied to growing income inequality – fewer people in the middle class – but that requires more research to figure out.
Something I haven’t mentioned anywhere else in this post but runs in the background of all these trends is technology. Technology, especially data but also includes manufacturing tech like 3D printing, is giving companies the ability to create customized and personalized products in almost any industry – which is certainly one way to create a premium product. When a company has created a customized product for you and owns the data to continue improving that product, it becomes a premium experience with a competitive advantage. That’s a tough combination to beat.
Getting started in a new industry can be super challenging but in today’s world of shorter stints with companies, quickly building working knowledge of a new industry is an extremely valuable and essential skill. Becoming fluent in your industry quickly means you start providing value sooner to your team, customers, employers, investors – everyone.
Back in the day (2012), I showed up to a lunch meeting in Pittsburgh with Adam Paulisick unprepared to answer his questions about the economics of college admissions, the industry I was running a company in at the time. He gave me some advice that stuck with me ever since: To win, you HAVE to know more about your industry than anyone else – there are no excuses.
Since that embarrassing episode, I’ve tried to apply Adam’s advice to everything I’ve done and developed a step by step process that makes the challenging process of getting up to speed in a new industry a bit more methodical:
Step 1: Read as much as you can about the market
There’s nothing to replace this step. Read EVERYTHING – articles, journals, books, forums, industry history, even tweets. Don’t judge anything you read yet – at this point in the process, you don’t know anything. If there’s some kind of overview book, start with that – if not, start with articles because they’re usually written in layman’s terms. You should absolutely be taking notes – the key here is to start building a knowledge base. Allow yourself to go down the rabbit hole.
One last thing on this topic: give yourself the time you need to read about the industry. Study for this like you studied for the SAT and make sure you block the time off on your calendar. This is just as important as any meeting.
Step 2: Find people who know a lot about the market and spend time with them
Talking to knowledgeable people and asking questions is something that should be done mostly in parallel with reading but make sure you’ve at least read a little bit first so you can ask relevant questions. Don’t worry about forming opinions yet – just keep building knowledge. Asking someone for their time initially feels scary (why would they want to talk to me?) but you’ll find that smart people: a) generally want to be helpful and b) are generous with their time when they sense you’re genuinely curious about their life’s work.
A simple hack here that’s been magical for me: Ask each person you talk to in the industry for one other person they recommend you talk to. Even better, ask if they can introduce you. Very quickly, you’ll have a network of really smart people who genuinely want to help you learn. #winning
Step 3: Form opinions and test them
The first two steps in this process are fairly straightforward – they require work but your ego isn’t at stake. The third step is what will require some courage. To figure out if your mental “picture” of your new industry is correct, you’ll have to form some opinions AND get a reaction on those opinions from knowledgeable people. Without getting a reaction on your opinions, you’ll simply be forming a (likely) incomplete/incorrect mental map of the industry. Feedback is what allows you to correct, iterate, and improve on your mental map to create something resembling reality.
One of the most amazing things about the discovery process is that this is the stage where tons of ingenuity comes from, likely because at this stage, you’re reasoning from first principles (as opposed to ingrained dogma). Cherish this point of the process even though it’s scary sometimes. The worst-case scenario is that you say something stupid – no big deal.
Step 4: Repeat, repeat, repeat!
This process isn’t something that should only be done when you first start working in a new industry. It should be done constantly so that you continually grow your knowledge base and keep your mental map up to date. The ultimate goal is to have what athletes refer to as “fingertip feel” of your industry.
Bonus Tip: Your ego is your worst enemy
All of the suggestions above require leaving your ego at home. If you can’t do that, all the feedback in the world won’t improve your mental map of any industry. Remember, feedback isn’t an insult – it’s a gift and a huge competitive advantage. Allow yourself to accept feedback and you’ll find that you’ve learned more about your industry in 6 months than most people learn in 10 years.