Tuesday, August 24, 2010

The Secret To Being A Low Cost, High Quality Provider

I often tell people that strategy is about making choices. If I want to be more dramatic, I tell them that it's about making sacrifices. But regardless of how I say it, I firmly believe that trying to be all things to all people is the swiftest road to failure.

So how is it that I'm writing about the secret to being a low cost/high quality provider?

We usually think of these two characteristics as being opposites. Albertson's and Whole Foods are both successful, but you'd never mistake the one for the other. Trying to provide Whole Foods quality at Albertson's prices should be a recipe for bankruptcy.

And yet, there is Trader Joe's. Fortune has done a wonderful profile of the secretive company, which I encourage you to read and re-read.

Somehow, Trader Joe's manages to provide both quality and bargains. And the grocery chain does so despite paying its people some of the best wages in the business. Full-time clerks make $40-60K/year, and store managers ("Captains") make six figures.

The secret? Productivity. And you can make that same secret work for you.

Trader Joe's can afford to pay its people more because it generates *double* the per-square foot sales of hoity-toity Whole Foods.

Trader Joe's can afford to sell its goods for less because by eliminating brands and focusing ruthlessly on 1/1oth the number of SKUs as the average grocery story, it has enormous bargaining power with suppliers.

It doesn't hurt that to suppliers, Trader Joe's is easy to work with--they pay on time, they don't charge slotting fees, and they know what they're doing.

Everything about Trader Joe's is designed to maximize productivity--of people, of shelf space, of capital--and as a result, it can afford to pay well and sell high quality goods at low prices.

(Costco follows a similar model, but they didn't have a conveniently public article to link to!)

Okay, so maybe this works for grocery stores. But what about other kinds of companies?

Nucor, America's most successful steel company, has a famous saying: "We hire the best, pay them for the work of three men, and get five men worth of work."

The key is productivity.

PBworks competes with companies that are many times its size. Yet it is able to serve millions of users and win the business of enterprise customers because its team is so productive, it can out innovate companies 10X its size.

A great software developer is 10X as productive as an average developer. If you can hire and retain productive superstars, you can have your cake and eat it too.

In the end, the secret is simple. Increase your productivity. Use those gains to deliver higher value at a lower price. Watch your business grow. Lather, rinse, repeat.

1 comment:

Rich said...

Here's some recent Costco coverage, again from Fortune ("The People Magazine of Business!")