House, MBA

House, MBA: What Strategists Can Learn From TV’s Nastiest Doctor

By Mark Chussil

(This post also appears on LinkedIn.)

In today’s Wall Street Journal (October 16, 2009), we find these contrary positions in “Safeway Shifts Tactics in Grocery Price War:”

“Last month, [Safeway CEO Steve] Burd conceded had the chain moved quicker to lower prices, it would be ‘doing a bit better than we are now.’”

“Increased use of promotions ‘destroyed our gross margin,’ Supervalu CEO Craig Herkert said last month at a Goldman Sachs conference. ‘More items really cheap don’t bring in more people.’”

There is truth in the notion that focus is valuable and in the notion that diversification is valuable. There is truth in leadership and in delegation. There is truth in caution and in action. There is truth in mass marketing and in segmentation. There is truth in price and in quality. Pick a business model, pick a buzzword, pick a fad; there’s probably truth in it, and in its opposite.

There’s also falsehood, or at least incompleteness, in each of those perspectives. Both Burd and Herkert expressed dissatisfaction with their results. Each CEO wished, if just a little, that he’d done what the other had done… and what the other was blaming for his dissatisfaction.

Burd and Herkert are experienced, high-powered professionals with plenty of data, analysis, and advice at their disposal, yet they come to opposite conclusions. I’m not criticizing them; quite the contrary, I’m sympathizing with them because they’re trying to cure sick systems with many moving parts.

Let’s consult with Gregory House, fictitious M.D., of the eponymous 2004-12 TV show. If you like House, he’s the witty, incisive doctor whose cool, unrelenting pursuit of the truth cures the patient. If you don’t like House, he’s the nasty, sarcastic doctor whose cold, unrelenting pursuit of his ego cures the patient. Cool or cold, he cures. If I were sick enough to need House, I’d want House.

Yes, House (the show) is fictitious and, I’m told, unrealistic. Still, the show beautifully illustrates ways to get insight into tough questions rigorously and effectively.

(Here I’m going to talk about Burd/Safeway and Herkert/Supervalu as though I know what I’m talking about when, in fact, I don’t. All I know is what I read in that Journal article. Plus, of course, what I’ve learned in 30+ years studying competitive strategy. I’m just using those CEOs and companies to illustrate what we can learn from House.)

House (the doctor) begins by writing symptoms in modest-sized letters on a white board. That’s significant for three reasons: he can add, he can erase, and he keeps everything in view. He writes those symptoms without unnecessary detail or precision; he simply writes “high blood pressure” and “headache.” Partly that’s because watching someone scrawl numbers and details isn’t exciting television. Partly it’s because it keeps him and his team focused on the big picture.

Strategy equivalent: I’ve seen, and I’m sure you have too, strategists spend time debating whether to adjust a price by 1.0% or 1.5%. There’s time for that later. Let’s figure out first if, say, anyone is suffering from malignant prices.

For Burd and Herkert, the symptoms are apparently pain in the profit: sales below expectations and margins below expectations. (It is unclear from the Journal article whether we should say expectations, desires, or targets. We’ll just say expectations.) Prices are not symptoms; their role in the symptoms has not yet been determined.

House writes those symptoms without interpretations. He may write “high blood pressure” and “headache;” he doesn’t write “headache from high blood pressure.” He and his staff are free to link high blood pressure and headache as they search for a diagnosis, but they don’t presume it. Something else might cause both (a side effect from medication, a thrillingly obscure disease). A symptom might even be irrelevant or temporary; the headache may go away after the morning’s 17 espressos wear off. He also collects relevant information about the patient.

Strategy equivalent: relevant business, competitive, and market information, without interpretation. Relevant: we must, for example, understand our competitors because our performance depends in part on what they do. It’s not good enough to study only our business. Without interpretations: notice the difference in assumptions and implied action between “our prices are too high” and “our prices are 10% above competitors’.” Note too that SWOT analysis builds in interpretations. Is it a strength or a weakness to price 10% above competitors?

Burd and Herkert would presumably know that the other is suffering too. They’d know also that they have similar big-retailer business models. They can readily measure prices in their markets.

Then House does something remarkably powerful: he starts fights. He doesn’t hold back his critiques as his staff suggests possible diagnoses. His staff doesn’t hold back their critiques as he suggests possible diagnoses. The fighting gets heated (perhaps inevitable when the boss’s favorite expression is “you idiot”) but everyone is clear that the objective is to diagnose and cure the patient. There are a few rules that guide the fighting: 1) treat causes, not symptoms; 2) find causes that fit all the symptoms; and 3) the way you do your job is to participate in the fight.

Strategy equivalent: resist jumping to advocacy and conclusions, resist anecdotal reasoning. Brainstorming, scenario planning, and what-if simulations help a lot. Business war games are particularly terrific for conducting civilized and highly constructive fights.

Still, in business there is tremendous pressure to advocate rather than debate and to act rather than diagnose. Moreover, strategists simply do not have the business equivalent of a body of medical literature based on centuries of scientific investigation. Without that deep knowledge it becomes especially important to question assumptions and to look for causal mechanisms. What has to happen for a price cut to work for Supervalu and for steady prices to work for Safeway? Hint: it’s not just one or two items. Think it through. Do the assumptions and causal mechanism make sense to you?

Burd and Herkert implemented different price moves, presumably after tracing the effects of price changes on their financials, taking into account fixed costs and variable costs. Both are unhappy. That suggests the price moves might not be the cause, or at least not the sole cause, for the same reason that we’d say 17 espressos might not cause a headache if identical twins both got headaches but only one had 17 espressos. What else could it be? Perhaps they have something else in common that could causally explain their shared unhappiness. (If they don’t, then we’d treat them as separate cases; there are multiple causes of headaches.) Similar business models that are unsuitable for the economic climate? New competition? Demographic changes? Inappropriate performance expectations? Notice that our statement of symptoms — performance below expectations — makes the latter possibility easy to see.

Finally, House adjudicates the fights. He’s willing to make a judgment call but that’s his last resort. He prefers the hypothesis/test method. If the 17 morning espressos are responsible for the headache but not the high blood pressure, then it must be true that the headache will fade as the espressos wear off but the blood pressure will stay high. That approach helps narrow the possibilities. Notice that it doesn’t completely confirm the role of the 17 espressos in the headache. If the patient had sipped the espressos at an outdoor café during rush hour, the headache might be the result of exhaust fumes, not espressos. House would need another test to prove that 17 espressos can cause a headache: administer a new batch of espressos where the air is clean.

Strategy equivalent: think like an experimenter. For example, think of Herkert’s statement as a hypothesis that low prices destroyed Supervalu’s gross margin and didn’t bring in more people. Think of Burd’s hypothesis that they could have done better if they’d cut prices sooner. How can we validate or dismiss those hypotheses? Look at comparable businesses who took those actions. Survey customers. Run simulation-based tests. Be careful how you measure: in a recession, “not bringing in more people” may be success, if other businesses are bringing in fewer people. And watch out for the exhaust-fume problem. What else was going on at the same time that Safeway held its price and Supervalu increased its promotions? The other-things-going-on might have been at Safeway and Supervalu, at competitors, in the economy, and so on, and might have nothing to do with price.

I haven’t conducted any of those experiments; all I’m doing is applying a TV show to a newspaper article so as to make a point and illustrate a technique. Let’s go with my imagination, though, for the sake of that point and technique.

• It wouldn’t be surprising to discover that comparable businesses are disappointed with their results. That would suggest that Burd and Heckert are not doing something uniquely wrong.
• It wouldn’t be surprising to find that customers are cutting back on purchases (buying less and/or buying cheaper) to deal with the economic crisis. That too would suggest nothing unique about Burd and Herkert.
• It wouldn’t be surprising to find that simulations show it’s possible to succeed with steady or lower prices, if the rest of the business adjusts appropriately. (An appropriate adjustment for steady prices might be to reduce capacity to fit a smaller number of customers. For lower prices, an adjustment might be to negotiate lower prices from suppliers or to buy lower-end goods.) We could check to see if Burd and Herkert have made such adjustments.
• We could measure competitors’ results and see if Safeway and Supervalu have gained, held, or lost market share. Their performance might have slid, but if they are outperforming the competition then they might actually be doing well. In other words, the diagnosis might be unrealistically high expectations, and the treatment is to change expectations. They can try to improve performance too, of course, but the role of price cuts is not clear.

There’s much more on this website on the subject of expectations and strategy decision-making, in both the Blog and the Library sections.

Update. There are options besides holding and cutting prices. See “Yes, You Can Raise Prices in a Downturn,” an interview with Benson P. Shapiro (Malcolm P. McNair Professor of Marketing Emeritus at Harvard Business School), Frank V. Cespedes (senior lecturer in the Entrepreneurial Management unit at Harvard Business School), and Elliot Ross (a former McKinsey consultant and President of The MFL Group in Beachwood, Ohio). See also Predicting Competitors.