The most important side of the critical path in most organizations is the revenue side. You can’t grow a company through cost reductions. You can only do it by increasing revenues. This requires an intense focus on the customer. In this sense, every worker must be working for the customer.
I once had a conversation with Bernard, a new worker at a mattress factory. Bernard was hired for 30 hours per week and said he needed more hours to make ends meet. I responded that Bernard must be hoping that his company sells more mattresses. But Bernard replied that he didn’t care if the company sold any more mattresses; he just wanted more hours. He didn’t understand the connection between customer purchases and his desire for more work hours.
I had a similar experience at a UPS Store when returning a damaged product to Amazon. When I walked up to the counter, the UPS clerk complained, “Not another package.”
So I asked, how many packages did this UPS location get each day?
“Too many. . . Hundreds, sometimes close to a thousand.”
“Isn’t that a good thing?”
“Not to me. It’s too much work.”
I asked, “Is there anything UPS could do to make it better or easier?”
“Sure,” she said, “have fewer customers. And stop doing so much business with Amazon.”
“What would that mean for your job?”
“It would mean I wouldn’t have to work so hard dealing with all these packages,” she replied.
“But aren’t you afraid that you might get fewer hours or lose your job?”
She looked puzzled and said, “Why would that happen?”
Like Bernard, the UPS employee didn’t see how the critical path had a connection to her work, let alone her livelihood. Instead of trying to figure out ways to improve the critical path so that it could more easily handle more packages and more customers, she wanted to shut out customers. Instead of seeing how e-commerce from companies like Amazon (and all of Amazon’s customers) increased UPS’s revenues and, hopefully, profitability, she saw them as an intrusion on her work life. In short, although she was directly on the critical path, she didn’t know it and wasn’t contributing to it in a positive way, either by reducing costs or generating revenues—in fact, she was wishing the company would generate less revenue!
Compare this to my experience at Trader Joe’s, the laidback, high quality-low priced grocery store famous for their gourmet items and “two-buck chuck” discounted wines.
As is typical on a Sunday, the store in Boston was packed with shoppers filling their carts.
At checkout, I said to the cashier, “You are really busy today with all the people in the store.”
She replied, “Yes, it’s a beautiful sight.”
“What do you mean?” I asked.
She looked out at the crowd and said, “Because all of them are here, and you are here, I get to be here with a good job—and that job is to help you find the products you want and to get you out as fast as I can ring you up.”
From a critical path perspective, what the Trader Joe’s cashier said is beautiful. She’s on the critical path and understands how that provides her a good job. If all Trader Joe’s employees are similar to her, it goes a long way to explaining why the company and brand are so successful in its very competitive grocery market.
This cashier reminded me of Vernon Hill’s view of the critical path. Hill was 27 and fresh out of business school. He looked around at the big banks and saw that they had taken their eyes off the critical path by taking their customers for granted. He started Commerce Bank, a state-chartered, one-branch bank in Marlton, New Jersey, with 9 employees, but no brand, no customers, and only $1.5 million in capital.
Hill focused on customer service, calling Commerce, “America’s most convenient bank.” He borrowed the best practices from America’s best retailors, including applying the volume lessons of McDonald’s selling millions of low-priced burgers. Most branches were open 7 days with extended evening hours up to midnight. Bank employees, wearing the bank’s signature red, greeted customers and were encouraged to have fun, much like Southwest Airlines flight attendants. A walking mascot of the letter “C” for “Commerce” wandered branch lobbies taking pictures with customers. Hill’s goal was to create loyal fans who appreciated the company’s customer service attention and would recruit their friends to switch to Commerce Bank.
By 2007, Hill grew the bank to some 460 branches, with 14,000 employees and combined deposits of about $40 billion. When he sold it to TD Bank for $8.5 billion, it was the 18th largest bank in the USA.
In 2010, at the age of 64, Hill decided to take his Commerce Bank experience to the U.K., where no new retail bank had opened in over 100 years. Using the same formula of customer service, he started Metro Bank there. According to Hill, the big stodgy banks operating in Britain treated the customers as if they should feel lucky to make a deposit there. For example, the banks usually were open only from 9 a.m. until 2 p.m. He adopted his American model of creating a customer-first experience. “Everything we did in New York, we do in London,” he says. “And everything we did in New York works better in London than it did in New York.”
Mr. Hill doesn’t believe that most depositors are overly concerned with price when shopping for a bank, such as the cost of a checking account or the interest rate offered on a savings account. Through his U.S. experience, Hill knows that convenience and service matter. Metro Banks are open seven days a week, most of them from 8 a.m. to 8 p.m. As for service, most of the big banks moved away from offering safe-deposit boxes, saying they were too “complex and costly.” Metro jumped into the vacuum to take over that business, which Mr. Hill knew to be a money-making machine.
Hill’s customer outreach underscores his belief that branding matters, too. His goal is to make going to the bank a fun experience for the Brits. For branch openings, he brought in clowns and balloons to appeal to customers’ children. Each branch also has a stock of dog treats for visiting canines. “In Britain the customer thinks if you love my dog you must love me,” Mr. Hill says.
The best way to measure brand value, according to Hill, is the percent of current customers that would recommend the bank to friends—a marketing concept known as “net promoter.” As the number one bank in Britain today in brand loyalty, Mr. Hill says, “We’re not some boring, unsexy bank.”
The data backs up this claim. Metro Bank had over 40 branches in 2016, when it went public with a market value over $2.1 billion—not bad for a company that started six years earlier with a $100 million initial capitalization. Metro Bank’s 717,000 customers in 2016 enabled it to pass the $7.5 billion mark in deposits with a 9% growth rate in the first quarter. Hill planned by 2020 to grow to 150 locations and $25 billion in deposits and other assets.
Although Hill had to step down from the CEO position after the stock price declined in 2019, when the bank disclosed that many of its loans had been put in the wrong risk band after a misinterpretation of its regulatory requirements, the business still seemed to be on solid footing. As Ian Gordon, an equity analyst at Investec, said of the bank’s bump in the road, “Customers still like the product, they still like the service.”
Finally, let’s return to LeBron James. In the last chapter, we saw how he lowered costs by eliminating the need for the Sales Department. He simultaneously affected the revenue side by increasing attendance, by increasing the customers’ willingness to pay higher ticket prices, and by increasing television ratings for the games, thus increasing advertising and sponsorship revenues. Forbes estimated that James added over $110 million to the value of the Miami Heat in his first two years with the team, while he only received about $37 million in salary. His critical path performance allows him to command his high (though capped) salary, as well as earn more than 2.5 times his salary in endorsements.
(As a side note, Mickey Arison, the owner of the Miami Heat, understood how to leverage premier talent, just as we will see in Lesson 52, Rupert Murdoch did with the Los Angeles Dodgers and Manchester United. Arison earned a 300% return on his investment in James.)
So, compare Bernard at the mattress factory to Vernon Hill or LeBron James and their understanding of how revenues make or break the critical path. Sure, Bernard’s an hourly worker and the others are star performers, but he can still learn from their example. You add value on the revenue side by giving customers a reason to do business with you and your company rather than an alternative, such as a competitor—or deciding they don’t need the intended product/service after all.
Critical Path Action Items
Where does your company’s revenue come from?
How could your company increase revenues in a meaningful way?
What could you do or propose to increase revenues?