Does your head know what your fingers do?
The strategic meaning of feedback loops
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One of my schoolmates was an avid chess player. His favorite rival lived in another country.
It was in the mid-80s, long before ICQ or Skype upended the world. International phone calls cost a fortune, so my friend used paper letters to play with his foreign opponent.
Making every move took weeks. My friend received a letter with his rival’s move, thought about his own move, wrote a response letter, and sent it by post.
40 years ago, such a Zen-like pace of communication didn’t seem unusual. But today, we can’t afford such a sluggishness in business.
DIY Clash in Eastern Europe
This story happened about 10 years ago in an Eastern European country. At the time, a large international chain dominated the local Do-It-Yourself retail market.
One could find their identical, ugly cubical-shaped stores in any big city. They offered the lowest prices and a wide range of flooring, paints, wallpapers, and boys’ toys like electric drills and chain saws.
The e-commerce market was booming, but the DIY industry was still terra incognita for online stores. Industry veterans believed customers would never buy ceramic tiles or lawnmowers without touching and seeing them.
A young, bold online startup team decided to challenge this belief.
Their online store, let’s call it XYZ, began with selling only power tools but soon widened the range of products. It was gaining traction and popularity day by day.
The big chain reacted the same way as Clifford Stoll responded to the Internet revolution in 1995: “The truth is no online database will replace your daily newspaper, no CD-ROM can take the place of a competent teacher and no computer network will change the way government works.”
Initially, the leaders of the local branch of the chain ignored XYZ.
Then, they claimed there was nothing worth noticing.
And then, they panicked and launched their own online store.
“We aren’t afraid of competition in e-commerce,” ranted the chain’s local CEO, a man in a very expensive suit, at industry conferences. "Every day, millions of people enter our brick-and-mortar stores. When we offer them the same selection of products and low prices in our online store, they will make the right choice."
And customers made the choice they believed was right. They chose XYZ.
The chain’s online store wasn’t just bad – it was awful.
The magic of feedback loops
The chain leaders made many mistakes when launching and operating the online store. They tried to manage it the same way they managed physical stores. For instance, they didn't consider that customers rarely visited several brick-and-mortar stores to compare prices, but when they surfed the Internet, they got dozens of attractive offers every minute.
But their biggest mistake lay elsewhere.
From the outside, large companies look like giant dinosaurs. Their ‘brains,’ negligibly tiny compared to their bodies' mass, are located somewhere above, among the clouds, in the ivory towers of their headquarters.
When the guys from the headquarters make a decision, it takes a lot of effort to push it through the system. But even if they are very good at it, it is not enough.
They may even believe they stay on top of things but don't often know what happens on the ground.
The XYZ team built what the chain management didn’t even think about: a feedback loop.
They were constantly experimenting, and they received the results of their experiments very quickly. They changed the appearance and interface of their website. They played with the promo campaigns, product range, prices, and loyalty programs.
They got feedback on the fly, which allowed them to adjust and fine-tune their ideas within weeks or even days. Customers left many electronic trails, which the team analyzed thoroughly to make the store more attractive.
The chain stuck to the traditional operational model. They waited for quarterly financial reports. These reports then went through dozens of committees and commissions. They were getting bloated with explanatory notes and presentation slides along the way, and after a few weeks, they would land on the desks of top management.
The XYZ team made more adjustments within a week than the chain within a year.
A customer complained on social media about the chain's online store: "They lost my order, and it took me weeks to get a refund!"
Another customer commented on their complaint: "They lost my order, too, and I didn't get a refund!"
Feedback loops and strategic decisions
In September 2022, Uber’s CEO Dara Khosrowshahi got behind the wheel himself. He spent a few weeks working as an Uber driver and learned firsthand what it meant.
Though it is a great example of ‘Going to Gemba,’ executives can’t spend too much time on the ground. They have their work to do.
However, what they should do is shorten the information chain between those who make decisions and those who benefit from them.
There are only two basic approaches to the task:
1. To build a high-speed information channel.
2. To empower people, provide for some team autonomy, and allow those who communicate with customers to call their own shots.
Your strategy may be a long, detailed plan or just a list of core principles. But in both cases, you need an effective, fast-working feedback loop to implement it.
Bonus tip
Today’s term translated into the most essential language in business — the language of needs and values, is price.
Price is the monetary equivalent of the value a company offers to customers.
If this value matches the value customers see in the product and fulfill their needs, the deal is made.
The book
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Read also: Your P&L Statement Misleads You: Learn to See the Core in Financial Reports
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