by Gene Kim
That generates smiles and a buzz of conversation, especially from Dick. “That would lift our net margins to levels we haven’t seen in four years, Steve,” he says. “It’s been way too long since we’ve actually surprised analysts, in a good way, that is.”
There’s laughter around the table, and Steve has a happy but tightlipped smile on his face. People are in a good mood, Maxine sees. Except Sarah, who is scowling, periodically taking out her phone and tapping furiously to someone.
Maxine stares at Steve and Sarah, mystified at the strange dynamics between them. Maggie continues, “There’s more good news. We’ve put a huge amount of focus on improving the in-store systems to better help store managers incorporate the practices that we know every one of our rock star store managers use. We’ve put a bunch of new capabilities into the tablets that employees use, making it easy for them to do things like look up the availability of parts and ship them from other stores.
“Maybe more importantly, in every tablet app, we took out any question that slowed down the ability for our in-store employees to help our customers,” she says. “We used to ask them for the customer name or phone number first, with no way to skip. No wonder our employees stopped using those tablets!
“In the last sixty days, in-store sales for our pilot stores are up almost seven percent,” Maggie explains. “To put this into perspective, the nonpilot stores have had flat or negative same-store sales. This performance is extremely noteworthy and shows that better customer service enables more sales, which has always been a Parts Unlimited core value.
“Like most businesses these days, we use the Net Promoter Score to rate customer satisfaction. We ask our customers, on a scale of 0 to 10, how likely it is that they would recommend our stores to their friends. The 9s and 10s are promoters, the 7s and 8s are neutrals, and the rest are detractors. To compute the score, we subtract the percentage of detractors from the percentage of promoters. An NPS score of thirty is considered good, and above fifty is great.
“For nearly a decade, we’ve hovered around fifteen, which puts us right in the middle of the pack among our competitors. But that’s also what most airlines get, so it’s really not something we brag about,” she says. “We did a little experiment after the Black Friday promotion. We compared people who bought a promoted item versus the population at large. Customers who bought something during our promotion swung eleven points higher than the rest. And when you look at the pilot stores with ship-to-store and the new in-store apps, they swing almost fifteen points higher.
“I’ve never seen anything like this in my career,” she says. “Those stores are now scoring higher than any of our competition. They’re now on par with some fantastic retailers, like Ikea. For a store that sells windshield wiper fluid, I think that’s pretty amazing.”
She moves on to the next slide: “Our store managers are also reporting improvements in employee engagement and morale. Here’s a quote from one store manager that I keep reading over and over again: ‘My in-store staff love the new in-store systems. One of my staff actually cried. She said that the old system not only made her feel stupid and helpless but also frustrated, because she couldn’t help our customers. Thank you so much to you and your team for making a real difference to my team and our customers!’”
Maxine hears impressed murmurs all around the table. Steve smiles broadly. “It’s been true for hundreds of years and probably thousands more: employee engagement and customer satisfaction are the only things that matter. If we do that right, and manage cash effectively, every other financial target will take care of itself.”
Maxine can’t help herself. She says to Dick, “As a numbers person, do you really believe what Steve said? That’s quite a bold claim, isn’t it?”
Dick smiles, as if he really appreciates the question. “I do believe it, especially as a numbers guy. Some of the most revered and admired companies all had that in their heyday, like Xerox, P&G, Walmart, Motorola … Now, it’s Toyota, Tesla, Apple, Microsoft, Amazon … How you achieve those metrics have changed, but the importance of those metrics are still the same.”
“Amen to that, Dick,” Erik says. “Well done, Maggie, Kurt, and Maxine.”
“It’s so exciting to see happen, and I really think we’re moving the needle,” Maggie says, smiling almost as broadly as Maxine is. “I’ve saved the best for last. Six months ago, we had one of the worst mobile apps in our industry. I’m guessing that all of you have installed the app but none of you have spent more than a couple of minutes in it.”
Maggie smiles, looking around the room at the sheepish grins around the table. She says, “Don’t feel too bad, because I hadn’t, either. Everyone knew that this was a real problem. If we can’t create a compelling reason to use the app, if we don’t solve an actual problem that our customers care about, why did we even build it in the first place?
“We’ve spent a lot of time studying our customers, trying to figure out their wants and needs,” she says. “So, we made a couple of bets, looking at what we could build that would keep customers coming back for more. Here’s one bet we made.”
She advances to the next slide, showing a picture of a VIN sticker that is on every car manufactured since 1954.
“Typing in these VIN numbers is the bane of almost every Parts Unlimited employee,” she says, resulting in knowing chuckles from all around the room. “All of you have worked in-store. You know how difficult and error-prone this is. We now enable customers to use their app to create a profile for all of their cars. They just scan the VIN on their car using their phone camera, and we automatically populate the information of their car: make, model, year, and we can even pull in records from Carfax and other services.
“Now they can walk into a store, and our in-store employees can scan a QR code on their phone to pull up their customer’s record. Our employees don’t need to walk out to the customer’s car, sometimes in the rain and snow, to write down that fourteen-digit VIN on a piece of paper.
“One of our store managers said, ‘This is a game changer. Besides being great for our customers, it’s great for our employees. For the first time, it’s like we’re doctors who have their patient’s charts on hand. We know our customer’s history, what’s important to them, and we can better help keep their cars on the road. I’ve been told thank you more times in the last month than I have in most years!’
“This could create some exciting business opportunities: we could potentially create all sorts of maintenance programs for them. We could explore subscription programs, where they automatically receive parts based on their consumption. We could potentially partner with service stations to get any needed work scheduled, or even do it ourselves,” she says, advancing to the next slide.
“To me, the success of all of these programs suggest that there are some opportunities that could dramatically reshape the future of Parts Unlimited,” she says, looking more serious than she has during the entire briefing.
“After the Black Friday promotion, Maxine said that we were still a long way from winning the war. Just like a better coupon campaign wouldn’t have saved Blockbuster, we are still a long way from figuring out how to survive the ‘digital disruption’ or ‘retail apocalypse.’ As good as the quarter may turn out, we haven’t blown up the Death Star. It’s still out there, and we need to figure out how to engage it in battle and win. Otherwise, we risk decline, irrelevance, or, worse, extinction.”
Maxine feels herself blushing but keeps her attention on the executives. She knows Maggie is starting her pitch.
“Project Unicorn could just be the beginning of learning how we can dominate the market by understanding our customers better than anyone else does,” she says. “After all, we created this market almost a century ago. Our proposal is that we fund more teams to explore the most promising business ideas, to find the next winner like the Unicorn Project.
“What I’ve learned in Promotions is that it’s an extremely experimental process, an exercise of exploration and lea
rning. Not every idea is a winner,” she says. “For every winning idea, there are many losing ideas. And some of the winners seemed outright crazy and never would have been approved by the typical middle-manager or committee. The literature suggests that in general, only one out of every three strategic ideas has a positive result, and only a third actually move the needle in a material way.
“And that’s for the big, strategic ideas,” she says. “For feature promotions, A/B tests, or algorithmic testing, you may be thrilled to even have five percent of tests work.
“We need a group that is dedicated and empowered to explore a broad range of business ideas that take advantage of our unique position in the marketplace, to quickly make bets, and then explore and validate them,” she says. “We need to have some way to quickly shut down bets that don’t pan out and to double-down on the winners.
“Project Unicorn shows that we have the capability to do this,” she says. “But this time around, we need to do it with the sponsorship and support of the highest levels of the organization.”
Maxine sees Steve smile, looking not just interested, but delighted. He applauds loudly, but before he can say anything, Erik speaks up.
“Ms. Lee is exactly right, Steve,” Erik says, looking up from his notebook, which appears to be full of doodles. “You are in charge of a century-old business that might finally be climbing out of its doldrums, thanks to the heroic work of Maggie, Kurt, and Maxine. Everything around you has been built upon the success of your Horizon 1 or cash-cow business. And as Maggie is alluding, you have nothing in Horizons 2 or 3.”
Maxine looks around and confirms that she’s not the only person confused by what Erik just said. Steve doesn’t appear to be phased by Erik’s non sequitur. Instead he asks, “What are Horizons 1, 2, and 3, and why are they important?”
“A great question,” Erik says, standing. “The concepts of Horizons 1, 2, and 3 were popularized by Sensei Dr. Geoffrey Moore, who is most famous for his book Crossing the Chasm, which introduced the customer adoption curve into modern business planning. He observed that customer adoption is a Gaussian distribution curve, naming them the innovators, early adopters, early majority, late majority, and laggards. And yet, as brilliant as this was, I think he will be best-known for the Four Zones, which help us better organize ourselves to win in all Three Horizons.
“Horizon 1 is your successful, cash-cow businesses, where the customer, business, and operational models are well-known and predictable. For you, that’s your manufacturing and retail operations, which make up sixty and forty percent of revenue, respectively. Both of these businesses generate over $1 billion in annual revenue but are under fierce attack by competitors and disruptors,” he says.
“Almost all businesses fade over time, because any profitable operation will attract competitors. The economic logic of selling reductions in transactional cost is irresistible and inevitable,” he says. “Which is why Horizon 2 lines of business are so important, because they represent the future of the company. They may introduce the company’s capabilities to new customers, adjacent markets, or with different business models. These endeavors may not be profitable, but this is where we find higher-growth areas. It is from here that enterprising leaders create the next generation of Horizon 1 businesses. For you, this transition happens when your Horizon 2 business revenue hits $100 million.
“You may have guessed that Horizon 2 efforts come from Horizon 3, where the focus is on velocity of learning and having a broad pool of ideas to explore,” he says. “Here, the name of the game is to prototype ideas and to answer as quickly as possible the three questions of market risk, technical risk, and business model risk: Does the idea solve a real customer need? Is it technically feasible? And is there a financially feasible engine of growth? If the answer is no to any of them, it’s time to pivot or kill the idea.
“If the answer is yes, then the idea is continually developed until it earns the right to graduate to Horizon 2, where the business builders take over,” he says, pausing for a moment. “Your obvious problem is that you have virtually no Horizon 2 businesses, and absolutely no Horizon 3.
“Steve, your intuition serves you well. You know you need to explore Horizon 3 opportunities. And you know how different Horizon 1 and 3 are,” he says. “Horizon 1 thrives on process and consistency, on rules and compliance, and on bureaucracies, which create extraordinary resilience. These are the mechanisms that allow greatness to be consistently delivered over decades.
“In contrast, in Horizon 3, you must go fast, you must be constantly experimenting, and you must be allowed to break all the rules and processes governing Horizon 1,” he continues. “As Maggie says, it’s about fast iteration, making lots of bets, and doubling down on the winners until they graduate to become Horizon 2 businesses. This is where the new methods are forged and mastered, which will likely help the organization survive into the next century.
“And in this age, and nowhere more than in Horizon 3, speed matters,” he says. “In the pharmaceutical business, the effort required to create a market offering is huge: billions of dollars are spent over a decade to create a new drug. The instant you have an idea, you patent it, which gives you only twenty years of IP protection before generic copies are allowed and your ability to charge a price premium disappears.
“There, Sensei Dr. Steven Spear observed that for each day you can get to market faster, you can often capture upwards of millions of dollars of additional revenue. If you’re first to market, you will capture fifty percent of the revenue that the entire product category will ever yield. Second place will capture twenty-five percent, and third place will get fifteen percent. For any later entrants, it will surely have been a complete waste of time and money.
“Speed matters. Or more precisely, lead time from idea to market offering matters,” he says. “And regardless of what horizon you’re in, this is the Age of Software. Almost all business investment now involves software. And that means we must elevate developer productivity, as Maxine has so splendidly done.”
Erik looks at his watch and starts gathering his things. “I will leave you with one last caution. Horizon 1 and Horizon 3 are often in conflict with each other.” He gestures at Sarah meaningfully. “Left unchecked, Horizon 1 leaders will consume all the resources of the company. They will note correctly that they are the lifeblood of the company, but that’s only true in the short term. There is an instinct to maximize profitability and take cash out of the business instead of reinvesting it. This is the ‘manage to value’ thesis and is the opposite of ‘manage to growth.’ If you want growth, Steve, you must protect Horizons 2 and 3, and any learnings generated there must be spread throughout the company.”
Erik looks to Maxine. “You saw how all the learnings from Data Hub and the Unicorn Project made it possible to achieve the original goals of the Phoenix Project. There are plenty more learnings to be had. And in fact, I suspect creating a learning organization will become front and center soon.”
Erik looks back at Steve. “You created one of the safest and most admired manufacturing organizations in the world by creating a unique learning culture, where physical safety is embraced by everyone in the organization,” he says. “What if psychological safety is as much of a precondition to dynamic, learning organizations as physical safety?”
He looks at his watch again. “I’ve got to run, folks,” he says, heading to the door. “I have a lunch date that I can’t miss. I wish you the best of luck! The survival of the company surely depends upon it.”
Everyone stares as Erik leaves the room, pulling his suitcase behind him. Maxine looks back at Steve, who looks thoughtful. With some awe, she remembers Erik suggesting that she must enlist Steve’s help to change the culture of fear of the technology organization. I can’t believe he teed that up for me, she thinks.
Maxine is trying to think of what she must do when Sarah stands up. She says, “Steve, as much as I appreciate what Maggie and her little team have done, I think t
his is a losing proposition. Your chairman and boss, Bob Strauss, has grave doubts about the future of the company,” Sarah says. “We cannot drive up R&D expenses for any wild-eyed ventures, these so-called ‘Horizon 3’ activities. We have demonstrated over and over that we simply do not have the DNA to compete against all the startups on the low end, and we cannot continue to fight a two-front battle on the manufacturing and retailing side on the high end at the same time.
“Our two Horizon 1 businesses are struggling. At this point, Bob’s idea of splitting up the company and selling off the pieces is our only prayer of salvaging shareholder value. Absolutely no one is interested in buying them together,” she says. “During our preparation for the January board meeting, Bob and our new board director, Alan, have convinced me that the growth path is just too risky. In fact, I’m convinced we should do another round of headcount reductions immediately to shore up profits.
“This is the right thing to do for our shareholders, and it will undoubtedly make us more attractive to acquirers when we start the roadshow with the investment bankers,” she continues. “This is what I’ll be recommending in my meeting with Bob and Alan in our special board subcommittee.”
Sarah gathers her things. With an expression that Maxine can only characterize as sinister, she says to Steve, “I notice that you were not invited to that meeting. Too bad. I’ll let you know how that meeting goes and what we decide.”
Maxine watches with everyone else as she opens the door and exits, wondering why Steve can’t just fire Sarah. Why does he put up with her antics? The excitement and pride she was feeling moments ago is gone. Could Sarah really disregard everything that the Unicorn Project had achieved? Was it all for nothing? She thinks back to when everyone was celebrating after the successful Black Friday launch, except Sarah, who had mysteriously disappeared.
Watching the door close, Maxine realizes that her worst fears about Sarah dismissing or undermining their efforts aren’t so crazy after all.
