Trade-Off by Kevin Maney

Trade-Off (Why Some Things Catch On, and Others Don’t)

Kevin was one of the technology reporters at USA Today. He struck me as being very smart and insightful. He is very good at observing and then translating them into action. He covered many technologies and companies and industries along the way. The best ones can make rigorous choices. The good leaders focussed on long term gains and had a strong set of values. You need to differentiate between a high-fidelity and a high-convenience. If business leaders focus on short-term, their businesses will be poor. You need to make choices that will distinguish yourself from others. Choose a great life. Hedgehog concept: Intersection between (1) passion; (2) genetic coding; (3) valuable contribution. Kevin has found his 3 circles. I met the CEO of Netflix. They relied on a traditional form of distributing DVDs over mail. ‘People are willing to trade the quality of an experience for the convenience of getting it.’ Reed Hastings, Netflix CEO. This was a powerful idea. This was also the essence of the book

Hollywood went into 3D big scale after 2007. Why? You need have a certain level of fidelity and convenience to attract customers. Sometimes, if you lack in both, customers won’t go. The move to 3D is trying to out-fidelity home systems. If you offer more fidelity, it needs to offset the inconvenience of heading to the theatre. Heading to a theatre is troublesome and the time slots may not suit you. It can be a mistake to aim for both fidelity and convenience, as will be explained later. This trade-off can be experienced in most economic situations.

There are 5 concepts behind the swap. Here goes: Fidelity vs convenience: Listening to music at home vs attending a concert. Most of the time, people choose low fidelity, high convenience. However, these decisions are not static and may change. The fidelity swap may change due to technology improvements. Do not fall into a fidelity belly. If you try to achieve both, you are likely to fail too. Super fidelity or super convenience wins. Having a social dimension to a product can increase its fidelity. Independent bookstores have fidelity advantages. Amazon is the king of convenience. Therefore, you need to identify your target market properly. A live concert is something that has high fidelity and is difficult to replicate.

Fidelity vs Convenience. Jeff Bezos was unveiling the Amazon kindle. They tried as hard as they could to replicate the book’s feel. They beat the books with their e-ink and brilliant user interface. One could look up words highlighted in the dictionary etc. Although it was a sell-off, the author saw that it could run into problems. A high fidelity education is one at Harvard and the top schools. Fidelity is more of the experience. It usually costs quite a lot. It also comprises of aura and identity. Aura pulls people into the live music concerts. It can be entirely based on marketing. This is known as perceived fidelity. Identity is when people feel that they belong somewhere if they own the product/service. Going to a concert has a big identity component. Experience plus aura plus identity equals fidelity. Convenience is about how easy it is to get something. A microwavable dish is convenient. There is a connotation of cheap when it comes to convenient product/services. The author believes that Amazon will win on convenience, but not fidelity. Technology advances will shift the fidelity-convenience border. Those products that relate on IT will surge forward in demand rapidly. A successful business is always loved or needed. Fidelity is about being loved. Fidelity basically refers to differentiation while Convenience refers to more mass-market product. It is super convenient to read on a Kindle.

My son and his friends preferred texting over other forms of communication, like calling. There was once when IBM managers used ‘Second Life’ to hold virtual meetings. They are more engaging than conference calls. The thing was that meetings on Second Life were not convenient. However, the tech people didn’t mind and made more attention to fidelity than convenience. If you are in a hurry, people tend to choose convenience. Some people sacrifice their land line and use a cell phone instead. Age plays a part and people are at different points in the trade off. People with high income also prefer fidelity. Convenience is needed, fidelity is loved. Do not fall in the fidelity belly. Blu-ray, when it was first launched, fell in the fidelity belly. The problem was that it cost a lot more, but offered little improvement in fidelity as compared to HD DVDs etc. Some entrepreneurs believe that things have to offer 10 times more fidelity or convenience in order to succeed and shock the market. The problem with convenience is that it is antimatter to aura and identity. By chasing both, you have neither.

The camera-phone was a great invention that wrecked trade-offs. This was a strategic inflexion point that changed an industry. The creator of the camera phone was Philippe Kahn and it revolutionized the industry. The camera phone was convenient. People who wanted fidelity could use real cameras. Cell phone cameras basically created a new market on its own. Things that have a social impact can receive a boost in fidelity. Now, there are companies that intentionally try and plot using a social element so as to gain an advantage. Online games which don’t have social element won’t take off. Mobile is about social value. Fantasy football has high social value even though the graphics might not be good. The fact is ‘low fidelity + social value’ trumps high fidelity. People try and add social elements to their products/services now. Social Media would be the future.

Corning, a manufacturer of glass, has thrived on fidelity for a long time. Your work should matter for future generations as well. Fibre-optics was one of their major product offerings. However, major global scandals affected fibre projects and cut Corning’s earnings. Weeks decided to embrace what the company did best and to stick to it. It was also necessary to grow through innovation. Their glass-based projects cannot be matched. It has the ability to make glass for the latest products in the market, like smart TVs. When your product has so high fidelity, people forget about convenience. Desire takes over. Being super high fidelity is where you want to be. Bose is one example of such a company. Later, it became a status symbol. If you have high fidelity, you can break into a new marketplace. The Prius is a high fidelity car that cares for the environment. Tesla is also an up and coming car in the market. Maintaining high fidelity is tough. The RAZR was a big hit at the start but it flopped later. Motorola failed to keep up with technology and stayed on 2G. To deal with this situation, they slashed their prices and went on convenience instead. This diluted their brand. Swamp-Root, a health supplement, worked on aura alone. It was 100% hype and the product was not effective. Later, when this was discovered, the product fell into the fidelity belly. High fidelity is sustainable only with constant investment. Wynn built casinos that toppled his competitors and he entered the high fidelity market. He wanted to be the highest margin operator.

MTV was about wanting people to see them perform pop songs. It was all about convenience of watching a concert on TV. If you are can find super convenience, you win. Six Flags beat Disney by focusing on convenience. They were located nearer to housing districts. Pittman was asked to lead AOL. AOL was all focused on convenience as well. It is more about habit than aura or love. McDonalds is an example of high convenience food. Convenient products need to work and cannot breakdown too frequently. Webvan, an online grocery store, also failed. It had delivery products and wasn’t that convenient because people couldn’t find their items. ATMs are a source of quick convenience. It has become one of the super-convenience things around nowadays. Wal-Mart was good at killing smaller retailers because they were cheaper and more convenient and had more products. However, in New York, travelling to a WM store was too inconvenient as there were too many independent stores nearby. As a result, WM failed in NY. Their forays into fashion magazines and advertising failed. Later, they stuck to their core principle of cheap goods. MooBella has been a successful super-convenient form of ice-cream.

Action normally only happens when there is a burning platform. Otherwise you still live the way you used to live. – Antonio Perez

Kodak fell into the fidelity belly. It was horrible. Kodak had invented the digital camera, ironically. In the past, they performed well in film and didn’t see the need to leave it. Antonio Perez, when he was made CEO, knew that they had to make things digital. He went around closing factories and sacking people. Fidelity belly is a no-man’s land. There are products in the belly which managed to get out. Amazon Kindle is one such example. Hulu beat Joost in offering TV shows at the user’s convenience. Hulu could run on an internet browser. Management needs to know where its path should be and focus on either one only. Not both. General Magic failed because they could offer neither. It was only at end of 2000, that the idea of an agent, or a system that would do things on your behalf, would work. In the past, newspapers were all about convenience. They achieved high fidelity in ‘deadline news’ and convenience in news. Online news usurped newspapers in convenience. Eventually, newspapers also lost in the area of deadline news. For newspapers to survive, they may want to address the older market as people of a certain age group do still read them. Another way is to kill the newspaper and take the good journalist to the Web and generate content. Gil Amelio and John Sculley didn’t focus on insanely great products when they were at Apple. MACs were an experience for consumers in the past. Apple proved that they managed to work their way out of the mess.

Starbucks chased the fidelity mirage in the late 2008. That became a huge problem. Schultz always wanted Starbucks to offer that fidelity image. Later, people associated themselves with Starbucks and the brand was formed. Starbucks charged a premium for their beverages. Familiarity killed it after Starbucks tried to expand rapidly. It started setting up franchises everywhere. Long ago, Schultz mentioned that he didn’t want to sacrifice elegance for growth. Excessive convenience dragged down their appeal. The stores sales started cannibalizing each other. A brand should continue to achieve its cool image. In 2008, Schultz decided that Starbucks needed to go back to its roots. He shut down a lot of stores and taught the baristas how to make coffee. IPods became a big hit in the mp3 market, but they were desired by the masses. Now, the super convenient image was diluting its brand. In Jan 2007, Apple released the iPhone. China is also trying to move in fidelity. But this will be a long process. It is trying to achieve both. India’s Infosys is also trying to move up the value chain and offer more. They want to create products that are loved. Coach tried to enter the mass market, where it eventually failed. Even Tiffany got sucked into the trap. Tiffany and Co. managed to get out by sticking to its fidelity image and quality diamonds/products.

Irving Wladawsky-Berger was given the job of guiding IBM’s Internet strategy. It was a brilliant move for IBM as they embraced Linux. They were once losing both to Sun Microsystems and Microsoft systems. They used AIX, which was super high fidelity, but not affordable at all. IBM focused too much on fidelity when their competitors could also serve the same function with their systems. It was a tie on fidelity. Linux was open-source, where anyone could work on it and improve things. IBM’s plan was now to use it. The quality of it turned out to be extremely good. Later, IBM managed to rebound in the server market. It was good enough fidelity but at low cost. The trick was to break the tie by embracing Linux. Truly creative ideas can affect fast-changing industries. The iRobot was one of the famous vacuum cleaners. Then later the Roomba was introduced. It was a big hit. It had a low cost, but offered the same level of fidelity. eSolar got a lot of funding from Google. It drove down production costs of solar panels on a large scale. They used thousands of small mirrors, each controlled by a small motor. For electricity, there was no difference in fidelity. It was all about convenience. In this case, it will match competitors on convenience, but step up on fidelity. Budget airlines worked because for almost a same level of fidelity, they offered a high level of convenience. Crandall invested in yield management for airlines. It could analyse ticket data etc. It generated different sort of pricing, depending on when you bought those tickets. This helped to maximize revenue in a big way. People Express was a budget airline who thrived from 1981 to 1985 but later collapsed because they didn’t use the yield management system.

Teledesic was an ambitious plan where the tech giants combined to send satellites into space. It failed miserably. Why? The tech giants were Microsoft and AT&T. At that time, Internet was still dormant and Teledesic seemed very promising indeed. The problem was that its fidelity/inconvenience trade off didn’t move for 8 years. The issue was that the industry, communication technologies changed, but the Teledesic idea didn’t. The project also chased the fidelity mirage and ignored technological changes. Knowing about the fidelity swap can help businesses but it doesn’t guarantee that no mistakes will be made. Do not forget the tech effect when you are creating something new. Success is about whether a product is hip, but where the product lies along the fidelity/convenience trade-off. Different set of consumers want different trade-offs. Smaller projects are more nimble and can adjust to the tech effect more easily. The Segway was launched in 2001 with big media coverage. The problems were that it was too expensive and that it was bulky too. It wasn’t very convenient because of its size and didn’t possess as high fidelity as a car. Thus, it was stuck in the fidelity belly at the start. The problem was that not many people wanted it at all. Why was the Palm Pilot a hit? The Newton was a handheld PDA, but it didn’t work. It was also not user-friendly and users had to attend a class to learn how to use it. In 1998, Apple killed the Newton. The Newton was a glorified notepad. Palm beat Newton because it was easier to input data. The next reason was that it was smaller than a Newton. It also managed to develop a following after a while. Shai Agassi wanted to bring electric cars to the mass-market. It was an open platform so that users could connect with one another and bond. The problem was that a huge investment in the system was needed to be made. The whole eco-system had to work together. Whether Better Place will succeed depends on time and when can they get the system out.

McNealy cofounded Sun Microsystems. Sun often embraced open-source. He thought that this model could be expanded to the education realm. It would also cost a fraction of a University education. Although there were high fidelity schools, there were not many convenient platforms around. He wanted to explore such platforms. For many years, the higher-education industry was only dominated by Universities. The problem with on-line learning was that it is not accredited. Now, more e-learning platforms are getting accredited and recognized. Smith saw that there was a market for high fidelity postal service. This eventually became the FedEx that we know today. Tata started producing a cheap car for the mass market. If a market is only dominated by pure fidelity/convenience, there is a potential market to enter. The American health care industry used to be only high fidelity.

The newspapers should segment their audience into those below 40 and those above 40. The older generator still preferred the newspapers. This was an idea for the newspapers to create a news website for the younger folks. A well-written book packages the author’s brain. You can bring your own imagination into play when it comes to reading. You can spend hours inside someone else’s head. It is possible to develop a relationship with the author. All books need to be high fidelity in order to survive, no matter what form taken. The delivery of the type of book doesn’t really matter, what matters is that the audience can connect with the author through the words and content.

The Hedgehog concept can be extended to personal life too. If you can’t be the best at an existing category, find a niche and be the best at that. Even when selecting a career, it helps to decide what to focus on. The higher your fidelity, the better rates you can command and the less convenient you will have to be. If you are not highest fidelity, do all you can to make yourself the most convenient one around. People need to constantly re-invent themselves in order to stay ahead. Do not be in a career that leads you trapped in a fidelity belly.

tradeoff image

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s