The Grid: The Decision-making Tool for Every Business – Matt Watkinson
Matt Watkinson is an internationally renowned author, speaker and business consultant. He was introduced to the idea of interconnectivity within the business world during a visit to his surgeon. As he wanted to fix his busted knees, he discovered how the body’s muscles are all intricately connected into a single system. When something is composed of interconnected parts, whether in a body or in a business, its overall behavior can’t be determined by looking at those parts in isolation. You have to look at it as a system, or as Matt defines it: the Grid.
The Grid structures crucial business parts into 9 simple boxes (see image below), giving you the entire picture. It allows you to manage conflicting goals, consider trade-offs and make decisions that improve the overall success of the business. Since the Grid comprises the basic elements of running a business, it is a tool that is scalable and can be used for ventures of any shape and size, or even to guide individual career decisions. It is a tool that helps you structure your thinking and assist in decision making. However, as it’s not a “one-size-fits-all answer” to your business problems, it is best used as a complement to other popular ways of working, such as the lean start-up movement, or business model generation.
2. An Overview of The Grid
There are 3 things that make for a successful business: Desirability, Profitability and Longevity (let’s call them “Goals”). Along with these goals are 3 distinct categories where change happens: Customers, Market, Organization (Let’s call these “Change Layers”). Because everything in a business is interconnected, each change layer can affect each goal.
Desirability: This is how much people want or need what you offer. The 3 change factors which determine desirability are:
- The wants and needs of the customer
- The rivalry we face in the market
- The offerings that our organization creates
Profitability: If people love what you provide but it costs more to make it than you can sell it for, you won’t be around for long. The 3 change factors that determine profitability are:
- Revenues from customers
- Bargaining power in the market
- Costs incurred by the organization
Longevity: There’s no point making a fortune today only to lose it all tomorrow. The change factors which determine longevity are:
- A growing and/or committed customer base
- Imitability in the market
- Adaptability of the organization
When put together, we get a 3×3 grid, with a column for each goal, and a row for each kind of change. This gives us 9 boxes, with each containing a factor that affects success, and when considered together, gives a holistic view of the enterprise and determines whether it succeeds or fails. This is how it looks:
(For more detailed pictures and work materials, click here)
3. The Grid, Deep Dive
What’s each of the 9 boxes? Let’s deep dive into each to find out!
DEEP DIVE ONE: WANTS & NEEDS
To serve a customer well is to know as much about him as possible. To truly understand your customers, there are three things you need to know.
The first step to understanding your customers is to consider their values and beliefs: how they identify themselves, and how you can reflect that image through your offerings. For example, Coca-Cola’s ‘Share a Coke’ campaign did this literally by replacing the logo on their bottle with names and the results were mind boggling: 150 million bottles sold and 998 million impressions on Twitter. If you want to become a killer marketer, I recommend reading this summary of Jab Jab Jab Right Hook by social media expert Gary Vaynerchuck.
Secondly, for your offering to be useful, it must satisfy a customer’s goal—even the unspoken ones. To find that out, you can consider customer goals from three perspectives: the super objective, the subtext and the success criteria.
The customer goals: 3 different perspectives
The super objective is an overarching goal that drives all other behavior (e.g. the super objective of reading a book is to learn from or enjoy the contents.)
To consider the subtext is to ask what your customer is thinking but not saying. What goals don’t they feel comfortable mentioning? For example, Lloyds Pharmacy has an ‘Online Doctor’ that offers specific discreet services for health issues such as hair-loss treatment, or erectile dysfunction. This solves the subtext of avoiding embarrassment for those customers that rather stay at home in pain indefinitely rather than go to the doctor about their problem.
The success criteria, is to document explicit and tangible outcomes about what your customer is trying to achieve with your offerings so that you can measure them later with feedback from the customers and employees.
Finally, your customers may experience barriers from three different categories: the operational, the experiential, and the financial. Operational barriers are issues such as difficult registration or account-creation processes, functional problems with the product, or simply, the lack of compatibility with products that customers already own. Experiential barriers are the customer’s inertia and unwillingness to experiment with something new. Financial barriers are when price points are inaccessible and the customer feels uncomfortable paying it. Lowering up-front costs or allowing payments through instalments are also clever ways to minimize the financial risk a customer may face.
DEEP DIVE TWO: RIVALRY
The best way to handle rivalry is to be different, and to do that is to start by forming a deep understanding of the competitive landscape. Only then can you decide how to best fit into it. The book suggests a three-step process.
Start by exploring your category: Make sure your products or services belong to existing established categories like ‘running shoes’ or ‘office chairs’. In that way, customers understand what the product is for and they have a basic idea of how to choose between options (e.g. the iPhone was marketed as a phone, not a hand-held nano-computer). In deciding which categories to compete in, consider the demand for the category, as well as the entry and exit barriers which exist for it.
The next step is to consider your territory – the geographical area you’ll cover. Make sure it is large enough to support the business you want to run and when you need to change to expand your territory. Think about how it would affect the rest of the grid.
Finally, analyze the competition: what are the direct alternatives or substitutes your customers will choose between and compare their strengths and weaknesses to your own range.
DEEP DIVE THREE: OFFERINGS
In the first deep dive, you got to know your customers and what they want. In the second, you explored the competitive landscape. Now, it’s time to pull these insights together to define your offerings. Every offering has three interdependent elements.
The proposition is the concept the customer buys into – a concise expression of what your product or service is and why it’s a good choice. To be compelling, your proposition should be distinctive (e.g. Instagram offers a free platform for users to share stories through pictures). It should also outperform rivals and industry norms where it matters (e.g. Tesla emphasizes areas where they outperform its alternatives in terms of safety)
The brand appeal is the overarching associations people have with your business. To build an appealing brand is to choose a distinctive set of associations you will actively promote. (E.g. Lush Cosmetics are associated with their strong ethics and equally strong-smelling stores). Once chosen, these brand values need to be expressed consistently. Every proposition and customer experience should reinforce rather than undermine them.
The customer experience encompasses the full spectrum of interactions customers have with you. A key of improving the customer experience lies in eliminating interactions which are below adequate, especially at the end of the customer’s experience. This can be done by including a couple of interactions that are better than the customer may usually expect, leaving them with nothing but positive memories.
DEEP DIVE FOUR: REVENUES
In order to survive, every business must make a profit. There are several revenue models to do so, for example: pay-as-you-go, royalty based, fixed price, subscription; etc.You should choose a revenue model based on what will make your offering most desirable, rather than starting with whatever model you have and retrofitting offerings onto it.
Once that is established, it’s time to turn your attention to pricing. There is no perfect way of knowing what the optimum prices are. Some principles are to manage prices on an ongoing basis, always monitoring price sensitivity and being prepared to experiment. Before implementing any price changes, the golden rule is to work out how a price change will affect your margins, costs and overall profitability before you do it.
The final piece of the revenue equation is volume. Volume is quantity x purchase frequency. Start by deciding which aspect of the volume equation you want to adjust – frequency or quantity. Then, decide whether that growth will be fuelled by new customers or existing ones and adjust the other elements of the grid to best help you achieve that goal. For example, an online retailer could sell more units (quantity) to new customers by improving the customer experience – converting more prospects into sales.
DEEP DIVE FIVE: BARGAINING POWER
The most valuable currency in business isn’t money, it’s power. Those in positions of power find wealth and profit easy to come by. You start with a power base and build profits, then let the two feed on each other. The secret is learning when to compete and when to cooperate.
Bargaining power starts with managing your buyer and supplier power, which hinge on the same principles:
- The more you buy, the more power you have.
- The harder it is for you to switch, the less power you have.
- The more important your product, the more power you have.
- Having more rivals equals less power.
- The more easily they could do your job, the less power your have.
Michael Porter’s Competitive Strategy gives a deeper insight on these forces.
Rules and regulations can directly affect customers’ wants and needs, mostly by changing beliefs and erecting or dismantling barriers. For instance, in 2016, the Federal Aviation Authority changed the rules controlling the use of commercial drones – instead of needing a pilot’s license to fly them, anyone over the age of 16 who passes a background check and an aeronautical knowledge test can operate one. This significantly lowered the barriers to purchasing and using a drone for commercial purposes, expanding the market to new customer: real-estate advertisers, for example, who can now take aerial photographs of properties on their books. When regulations change you must consider how certain elements will be affected, since one new regulation can impact many boxes simultaneously.
DEEP DIVE SIX: COSTS
“Costs can get away from you one day at a time; expenses that start small turn big; In boom times you get really disconnected from the fundamentals… You don’t win by managing costs, but it’s an important step for any business.” – Drew Houston, CEO, Dropbox
In managing fixed and variable costs, monitor them regularly to see that costs like headcount are under strict control. Look for ways to eliminate waste (unnecessary costs) from your operations. Make sure you have management reports that are able to help you make informed decisions about cost. When deciding on the optimal cost structure (ratio of fixed to variable costs) for your business, consider how they would impact other elements of the grid like rivalry, imitability or adaptability.
Capital Expenditures is also a good way to translate expenditures into returns on investments over the lifetime of the investment. Considering what to buy and its long term impact is a key constraint in the business.
DEEP DIVE SEVEN: CUSTOMER BASE
Businesses fail either because they leave their customers or their customers leave them. A healthy customer base is key to a business’s longevity, and there are three moving parts to consider in building that:
Firstly, customers can’t buy something they don’t know exists, and even if they’ve bought before they can easily forget about you. Building and maintaining awareness of your brand is vital. Make sure your product can be clearly explained in a couple of sentences, and that it is easy to recognise. To establish a brand in people’s minds, be consistent with your message, style, appearance or tone. High-performance brands are consistent, finding creative new ways to tell the same old story.
Secondly, that awareness should lead to customer acquisition. Doing so creates much larger growth opportunities, because new customers can drive word of mouth more powerfully than existing ones.
Finally, this leads to retention – keeping hold of the customers you have worked so hard to win. Some techniques that aid retention are: personalization, loyalty schemes, contractual terms, or simply offering products which are habit-forming (or addictive!). To accompany these techniques, you should make sure that your company improves customer satisfaction enough to create true loyalty, not disgruntled consumers.
DEEP DIVE EIGHT: IMITABILITY
The harder you are to imitate, the better. If a company’s whole product is just a new feature to a competitor, it’s not going to last that long. For example, daily users for Facebook’s Instagram Stories surpassed Snapchat in just a short span of one year from its launch.
A three-pronged approach helps keep imitators at bay.
You can seek legal protection by applying for patents, trademarks and copyrights.
Another way is to build durable advantages such as a unique cost structure (for example, Costco famously changed the packaging of their cashew nuts from a round to a square container to fit more onto a pallet, saving 400 truck journeys a year) or product ecosystem (for example, Apple creates a set of products that work together, making it hard to switch one without switching them all).
Finally, you can create competitor lag by constantly moving forward so rivals must aim at a moving target. This can involve anticipating and making important changes ahead of rivals.
DEEP DIVE NINE: ADAPTABILITY
This last segment is the key to long term success, and yet seldom gets the consideration it deserves. Given the choice between improving adaptability and improving some other element of the grid – cutting costs or bumping up revenues in the short term – it’s adaptability that usually gets sacrificed. With these in mind, this final deep dive explores the factors that improve or compromise your adaptive capacity:
- Cash position – Keeping an eye on the free cash flow, a very useful metric which reveals how much cash the business has to explore other opportunities or to insulate it from change. The company’s working capital matters as much as a company’s profits on paper.
- Scalability or Capacity – Ensure the business can easily scale up or down and allow for sufficient slack in your operations to allow you to respond to change quickly.
- Complexity and Rigidity – Take note of how the enterprise’s structure changes as it grows. Most enterprises gain complexity and rigidity especially through multi-level bureaucracy as they grow, making it difficult to adapt when conditions change.
- Maintaining Adaptability – This is where the management works on building an attitude of humility, questioning your company’s growth trajectory, and spending time on the front line with customers to understand their needs and experience your own products (and alternatives) first-hand.
3. FINAL THOUGHTS
There are many strategies on how to best use the grid. A process which has been recommended is:
- Identify which box or element you want to improve.
- Come up with a range of possible solutions.
- Run each possible solution through the grid to assess the overall impact on the business.
- Choose the best route forward and decide on the next steps for implementation.
I enjoyed how the Grid provides one with a clear and succinct methodology to work through the impact of business decisions. While lengthy, the book doesn’t contain as many extensive examples and case studies to substantiate each deep dive, and would best be used as a tool to quickly identify the business trade-offs, risks and opportunities at a single shot. Each deep dive can be referenced and read individually (which is a great plus point) and should be supplemented by further readings which have been recommended at the end.