Intel’s Andy Grove on Looking at Problems from an Outsider’s Perspective

Look at Problems from an Outsider's Perspective

Fixation Hinders Creative Thinking

In two previous articles (this and this,) I’ve addressed the psychological concept of a “fixed mental set” or “fixation:” assessing a problem from a habituated perspective can prevent you from seeing the obvious and from breaking away from an entrenched pattern of thinking.

A period of rest, entertainment, or exposure to an alternative environment can usually dissipate fixation. The resulting shift in perspective can alter your point of view in a literal and sensory way, or it may change the way you think about or define the problem at hand.

A particularly instructive example of the beneficial effects of altering thought perspectives comes from Andy Grove’s autobiography / management primer Only the Paranoid Survive (1996.) Grove, the former Chairman and CEO of Intel who passed away earlier this year, was one of the most influential tech executives Silicon Valley has ever seen.

Japanese Onslaught on Intel’s Memory Business

'Only the Paranoid Survive' by Andrew S. Grove (ISBN 0385483821) Memory chips dominated Intel’s revenue, since the company was founded in 1968. In fact, Intel had a near monopoly in the memory business. However, by the late ’70s, a few Japanese competitors emerged. Grove reflected, “The quality levels attributed to Japanese memories were beyond what we thought possible. … Our first reaction was denial. We vigorously attacked the data.” In due course, Intel recognized the threat to its competitive position. (Between 1978 and 1988, the Japanese companies grew their market share in the memory business from 30% to 60%.)

At the same time, a small entrepreneurial team of engineers had developed Intel’s first microprocessor. In 1981, Intel persuaded IBM to choose this microprocessor to run their personal computers.

By 1985, when Grove was President, Intel’s executives engaged in an intense debate on how to respond to the onslaught of Japanese competitors in the memory business. One faction of engineers wanted to leapfrog the Japanese and build better memory chips. Another faction was in favor of disposing the lucrative memory business and betting Intel’s future on its promising microprocessor technology—something they believed the Japanese couldn’t match.

The “Revolving Door Test:” Getting an Outsider’s Perspective

In the middle of this intense debate, Grove was at a meeting with Intel’s CEO, Gordon Moore (of the Moore’s Law fame.) Grove had an idea for Moore; he recalled this episode in Only the Paranoid Survive,

I remember a time in the middle of 1985, after this aimless wandering had been going on for almost a year. I was in my office with Intel’s chairman and CEO, Gordon Moore, and we were discussing our quandary. Our mood was downbeat. I looked out the window at the Ferris Wheel of the Great America amusement park revolving in the distance, then I turned back to Gordon and asked, “If we got kicked out and the board brought in a new CEO, what do you think he would do?” Gordon answered without hesitation, “He would get us out of memories.” I stared at him, numb, then said, “Why don’t you and I walk out the door, come back in and do it ourselves?”

Andy Grove's Revolving Door Test: Getting an Outsider's Perspective The switch in perspective—i.e. asking “What would our successors do?”—provided a moment of clarity for Moore and Grove. By contemplating Intel’s strategic challenges from an outsider’s perspective, shutting down the memory business was the discernible choice. Even Intel’s customers were supportive:

In fact, when we informed them of the decision, some of them reacted with the comment, “It sure took you a long time.” People who have no emotional stake in a decision can see what needs to be done sooner.

From the time Intel made the important decision to kill its memory chips business, it has dominated the microprocessor market.

If existing management want to keep their jobs when the basics of the business are undergoing profound change, they must adopt an outsider’s intellectual objectivity. They must do what they need to do to get through the strategic inflection point unfettered by any emotional attachment to the past. That’s what Gordon and I had to do when we figuratively went out the door, stomped out our cigarettes and returned to the job.

People in the trenches are usually in touch with pending changes early. Salespeople understand shifting customer demand before management does; financial analysts are the earliest to know when the fundamentals of a business change. While management was kept from responding by beliefs that were shaped by out earlier successes, our production planners and financial analysts dealt with allocations and numbers in an objective world.

Idea for Impact: If You’re Stuck on a Problem, Shift Your Perspective

Often, you can find the solutions to difficult problems merely by defining or formulating them in a new, more productive way.

Consider employing Andy Grove’s “Revolving Door Test” and examining your problems through an outsider’s lens. This shift in perspective may not only engender intellectual objectivity but also muffle the emotion and anxiety that comes with momentous decision-making.

How Smart Companies Get Smarter: Seek and Solve Systemic Deficiencies

At Toyota, as cars roll off the assembly line, they go through a final inspection station staffed by astute visual and tactile inspectors.

At Toyota, as cars roll off the assembly line, they go through a final inspection station staffed by astute visual and tactile inspectors. If these inspectors spot a paint defect, they don’t just quietly fix the problem merely by touching up the paint to satisfy the customer or their plant manager.

As part of Toyota’s famed kaizen continuous improvement system, floor workers identify the systemic causes that led to the specific defect on the specific car. They then remedy the root cause of the problem so it won’t happen again.

Fostering an atmosphere of continuous improvement and learning

Most companies cherish employees who are watchful of problems and take it upon themselves to detect and solve problems without criticism or complaint. A software company, for example, may treasure a programmer who observes an unforeseen coding mistake, and swiftly develops a patch to keep her project moving forward.

In contrast, companies like Toyota who are obsessive about quality improvement, organizational learning, and developing collective intelligence don’t reward or tolerate such quiet fixers.

Taiichi Ohno - 'Having no problems is the biggest problem of all.' At companies that have adopted the kaizen philosophy, continuous improvement originates from the bottom up through suggestion systems that engage and motivate floor employees to look out for systemic problems, raise quality concerns, and help solve those problems. These companies encourage their employees to actively seek small, simple, and incremental improvements that could result in real cost savings, higher quality, or better productivity. According to Taiichi Ohno, the legendary Japanese industrial engineer identified as the father of the Toyota Production System, “Something is wrong if workers do not look around each day, find things that are tedious or boring, and then rewrite the procedures. Even last month’s manual should be out of date.”

Idea for Impact: To develop collective intelligence and build smarter organizations, discourage employees from heroically patching up recurring problems. Instead, encourage them to find, report, analyze, experiment, and fix systemic problems to prevent their recurrence.

Lessons from Amazon: ‘Mock Press Release’ Discipline to Sell an Idea

If you have a brilliant idea at work, the modern workplace demands that you distill your ideas into a killer PowerPoint presentation to enlighten, entertain (with animations and special effects,) and convince your audience.

As I mentioned in my previous blog article, presentations may make ineffective communication tools. They tend to promote “a seductive laziness of thought that is anti-rigor, anti-elegance, and—most damaging—anti-audience.”

'The Everything Store' by Brad Stone (ISBN 0316219266) Amazon’s corporate culture agrees. In Brad Stone’s The Everything Store, former Amazon executive Jeff Holden commented that “PowerPoint is a very imprecise communication mechanism. It is fantastically easy to hide between bullet points. You are never forced to express your thoughts completely.”

Instead of PowerPoint presentations, Amazon uses a narrative format called the ‘Mock Press Release.’ According to this disciplined approach, for every new feature, product, or service that employees intend to pitch within their divisions, they must produce a press release-style document wherein a hypothetical Amazon customer would first learn about the feature.

Amazon contends that if something isn’t interesting enough for a customer and can’t be eloquently expressed in a mock press release format, Amazon probably shouldn’t invest in the idea. Brad Stone’s The Everything Store mentions,

Bezos announced that employees could no longer use such corporate crutches and would have to write their presentations in prose, in what he called narratives. … He wanted people thinking deeply and taking the time to express their thoughts cogently.

Bezos refined the formula even further. Every time a new feature or product was proposed, he decreed that the narrative should take the shape of a mock press release. The goal was to get employees to distill a pitch into its purest essence, to start from something the customer might see—the public announcement—and work backward.

Amazon’s famously customer-oriented culture argues that this disciplined innovation forces all ideas to be rationalized from the customers’ perspective. Therefore, Amazon encourages it’s employees to write these mock press releases in what’s internally called “Oprah-speak” (how the idea would be explained plainly on The Oprah Winfrey Show) rather than in “geek speak.”

Jeff Bezos of Amazon

Rather than have employees present their ideas using PowerPoint decks, attendees receive copies of multi-page narratives (as opposed to the one-page format used at Procter & Gamble) and study the ideas before ensuing debate and decision.

On Quora, former Amazon executive Ian McAllister argued the advantages of this narrative form:

We try to work backwards from the customer, rather than starting with an idea for a product and trying to bolt customers onto it. While working backwards can be applied to any specific product decision, using this approach is especially important when developing new products or features.

McAllister also provided a sample outline for the Amazon mock press release,

  • Heading – Name the product in a way the reader (i.e. your target customers) will understand.
  • Sub-Heading – Describe who the market for the product is and what benefit they get. One sentence only underneath the title.
  • Summary – Give a summary of the product and the benefit. Assume the reader will not read anything else so make this paragraph good.
  • Problem – Describe the problem your product solves.
  • Solution – Describe how your product elegantly solves the problem.
  • Quote from You – A quote from a spokesperson in your company.
  • How to Get Started – Describe how easy it is to get started.
  • Customer Quote – Provide a quote from a hypothetical customer that describes how they experienced the benefit.
  • Closing and Call to Action – Wrap it up and give pointers where the reader should go next.

Also see:

Lessons from Procter & Gamble: ‘One-Page Memo’ to Sell an Idea

In effective communication, less is often more. Brevity can communicate ideas more clearly.

Procter & Gamble (P&G) Logo Based on this idea, Procter & Gamble (P&G)’s corporate culture uses a powerful discipline called the ‘One-Page Memo’ for clear and concise communication.

P&G’s corporate culture requires any idea or proposal to fit onto one side of one piece of paper and must follow a predictable format. According to Charles Decker’s excellent book Winning with the P&G 99, the one-page memo consists of the following narrative elements:

  • Statement of Purpose: An introductory sentence that concisely and succinctly states the reason for the recommendation. Provides a context for the memo as a whole.
  • Background: Factual analysis that connects the purpose of the memo to the strategic objectives of the company or the brand. Also provides facts in relation to the problem the recommendation is supposed to address.
  • Recommendation: The specific proposal on how to solve the problem or exploit the opportunity detailed in the background section.
  • Rationale: The reasons for the recommendation, and the logic by which the recommendation was reached.
  • Discussion: Details of the recommendation, anticipated questions or areas of concern, risk assessment, identification of other alternatives, details of the recommendation.
  • Next Steps: Who will be following through on the recommendation, what target dates they would be working towards, what actions they would be taking to execute the recommendation.
  • Supporting Exhibits: Other supplementary information as applicable.

The last item, the supporting exhibits, provides additional data to validate the rest of the one-page memo.

Charles Decker states, “If you can learn to write a P&G memo, you can learn how to think. The memo becomes a knowledge codification tool, a way to present ideas, arguments, and recommendations in a language and style everyone at P&G understands.”

Winning with the P&G 99 also quotes an advertising agency executive: “P&G seems to have figured out that if you structure information certain ways, people will readily understand it, good ideas will emerge, and bad ideas will be exposed. I really think that is what has made them so successful. They make fewer mistakes because they find mistakes before they happen.”

Additionally, P&G’s renowned salesforce uses a Persuasive Selling Format (PSF) narrative that is structured along similar lines.

Use Zero-Base Budgeting to Build a Culture of Cost Management

Zero-Base Budgeting

Traditional Incremental Budgeting

As part of the traditional budgeting process, managers tend to roll their budget over from one year to the next. In addition to accounting for any strategic initiatives or headcount changes, they simply add to every line-item in the previous year’s budget a certain percentage “and then some” to account for cost inflation. They assume that the ‘baseline’ is automatically approved, so they justify just the variances versus prior years.

The drawback of this budgeting process is that nobody questions the underlying ‘baseline’ costs. Further, these cost increases are carried from year to year.

Zero-Base Budgeting

'Zero-base Budgeting' by Peter A Pyhrr (ISBN 047170234X) In the 1970s, Peter Pyhrr, a Texas Instruments accountant, formally developed zero-base budgeting. In his influential Harvard Business Review article and a book titled Zero-base Budgeting, Pyhrr advocated that a prior year’s budget should not be used as a benchmark for the next year’s budgeted costs.

With zero-base budgeting, managers prepare a fresh budget every year without reference to the past. Consequently, they start every line-item in the budget from a zero-base even if the amount didn’t increase from the previous year. They are thus forced to justify all claims on their organization’s financial resources as if they were entirely new claims for entirely new projects.

Advantages and Disadvantages of Zero-Base Budgeting

Zero-base budgeting advocates say that it detects inflated budgets and unearths cost savings by focusing on priorities rather than simply relying on the precedent. Managers secure a tighter focus on operations by justifying each line-item in their budgets, thereby reducing the money they allocate to the lowest level possible. Managers can also contrast competing claims on their ever-scarce financial resources and therefore shift funds to more impactful projects.

Zero-base budgeting critics call attention to the many practical difficulties of implementing this time-consuming tool. More importantly, since zero-base involves give-and-take, the budgeting process is susceptible to favoritism, cronyism, and political influence.

3G Capital’s Success with Zero-Base Budgeting

'The 3G Way: An introduction to the management style of the trio' by Francisco S. Homem de Mello (ISBN B00MKKWZME) Zero-base budgeting has garnered much attention in the last few years as the centerpiece of an aggressive cost-cutting recipe used by 3G Capital, a thriving Brazilian buyout firm that’s renowned for its parsimonious operations. 3G’s predominant investment strategy is to acquire and then squeeze value out of companies, particularly in the food and restaurant industries.

At Anheuser-Busch, InBev, Tim Hortons, Burger King, Heinz, Kraft, and other acquired companies, 3G’s hard-nosed managers have used zero-base budgeting to initiate sweeping cost cuts. They’ve shut down factories, laid off thousands of factory workers, eliminated hundreds of management jobs, sold off corporate jets, forced executives to fly coach, restricted employees’ office supplies to $15 a month, and even asked employees to seek permission to take color printouts.

'Dream Big' by Cristiane Correa (ISBN 8543100836) Inspired by 3G, many other companies have adapted zero-base budgeting to root out bloat. Some have even gotten carried away—for example, Pilgrim’s Pride (an American meat-processing company) used zero-base budgeting to measure how much soap employees use to wash their hands and how much Gatorade hourly employees consume during breaks.

Idea for Impact: Zero-Base Budgeting Is an Effective Cost-Management Tool

Cutting operating costs is an ever-bigger priority at many organizations. For each line-item in your budget, ask “Should this be done at all?” and “Is this the most efficient and effective use of our resources?”

Consider zero-base budgeting to rigorously find cost-effective ways to improve your operations. It can bring about cost discipline, force your operations to become lean, and ultimately boost your bottom line.

Suggested Reading

Find out What Your Customers Want and Give It to Them

“Nobody asked the dogs what they wanted”

Dog Food Product Once upon a time, a pet-foods company struggled to sell a new dog food product they’d recently introduced to the market.

The company’s CEO called the department heads together to discuss why the new product wouldn’t sell.

The head of production said he’d done everything right; it wasn’t his department’s fault.

The heads of the sales, advertising, finance, packaging, shipping, and distribution departments had done everything right. None of them were to blame.

The CEO demanded, “Darn! What happened? Why won’t our new product sell?”

A junior staffer shouted from the back of the room, “Sir, it’s just that the dogs simply won’t eat our doggone food. You see, nobody asked the dogs what they wanted.”

Idea for Impact: Customer Focus Drives Company Success

Your research and development efforts will be successful only if they’re driven by a thorough understanding of what your customers want. Engage your customers. Pay close attention to their needs in every phase of product/service design including idea generation, product design, prototyping, production, distribution, and service. Remember Peter Drucker’s dictum that “the purpose of a business is to create and keep a customer.”

Serendipity and Entrepreneurship in the Invention of Corn Flakes

In previous articles about Johnson’s Baby Powder and Picasso’s Blue Period, I discussed serendipity as a rich phenomenon that is central to entrepreneurial and artistic processes. In this article, I will discuss another case study of ideas born by chance and reinforced by casual observation and customer input.

One of America’s Favorite Cereals was Invented by Fortuitous Accident

Will Keith Kellogg invented corn flakes in 1894 at a sanitarium in Battle Creek, Michigan Will Keith Kellogg invented corn flakes in 1894 at a sanitarium in Battle Creek, Michigan. Will worked there as an assistant to his brother Dr. John Harvey Kellogg and helped research patients’ diets.

One day, while making bread dough at the sanitarium, Will accidentally left boiled wheat sitting out overnight unattended. When he returned to roll the wheat into dough, he discovered that it had dried out and was flaky. Interested to see what would happen, Will passed the flaky dough through the bread rollers and baked them to create a crunchy snack. He seasoned the flakes with salt and fed them with milk to the sanitarium’s patients. The wheat flakes were an immediate hit. Indeed, after some patients left the sanitarium, they ordered Kellogg’s flakes by post.

Will Kellogg’s Entrepreneurial Ingenuity

Serendipity and Entrepreneurship in the Invention of Kellogg Corn flakes Will Kellogg then tinkered his recipe for wheat flakes and ultimately settled on using corn in place of wheat as the flakes’ main ingredient.

In 1906, Will Kellogg launched “The Battle Creek Toasted Corn Flakes Company.” In addition to inventing corn flakes, Kellogg had a genius for business and marketing. He was a pioneer in testing markets, sampling products, using multi-color print advertisements, and developing innovative marketing campaigns.

Kellogg was keen on using slogans to promote his company’s products. In 1907, he introduced a marketing campaign that declared, “Wednesday is Wink Day in New York.” Every woman who winked at her grocer on a Wednesday received a free packet of corn flakes. Corn flakes sales skyrocketed.

Will Kellogg was also a prominent philanthropist and, in 1934, started the W. K. Kellogg Foundation.

The company Will Kellogg founded eventually became Kellogg Company, a prominent cereal and convenience foods multinational.

Success Conceals Wickedness

Biographies of Steve Jobs (by Walter Isaacson,) Jeff Bezos (by Brad Stone,) and Elon Musk (by Ashlee Vance)

Two common themes in the biographies of Steve Jobs (by Walter Isaacson,) Jeff Bezos (by Brad Stone,) and Elon Musk (by Ashley Vance) are these entrepreneurs’ extreme personalities and the costs of their extraordinary successes.

The world mostly regards Musk, Jobs, and Bezos as passionate, inspiring, visionary, and charismatic leaders who’ve transformed their industries. Yet their biographies paint a vivid picture of how ill-mannered these innovators are (or were, in the case of Jobs). They exercise ruthless control over every aspect of their companies’ products but have little tolerance for underperformers. They are extremely demanding of employees and unnecessarily demeaning to people who help them succeed.

  • Steve Jobs was renowned for his cranky, rude, spiteful, and controlling outlook. Biographer Isaacson recalls, “Nasty was not necessary. It hindered him more than it helped him.” Jobs famously drove his Mercedes around without a license and frequently parked in handicapped spots. For years, he denied paternity of his first daughter Lisa and forced her and her mother to live on welfare. He often threw tantrums when he didn’t get his way and publicly humiliated employees.
  • In a 2010 commencement address at Princeton, Jeff Bezos recalled his grandfather counseling, “Jeff, one day you’ll understand that it’s harder to be kind than clever.” Still, according to Brad Stone’s biography, Bezos often imparts insulting rebukes and criticisms to employees: “I’m sorry, did I take my stupid pills today?” “Are you lazy or just incompetent?” “Why are you wasting my life?” and “Do I need to go down and get the certificate that says I’m CEO of the company to get you to stop challenging me on this?”
  • According to Ashlee Vance’s biography, when an executive assistant asked for a raise, Elon Musk asked her to take a two-week vacation while he contemplated her request. When the assistant returned from vacation, Musk fired her.

“Success covers a multitude of blunders”

The great Irish playwright Oscar Wilde once remarked, “No object is so beautiful that, under certain conditions, it will not look ugly.”

The other great Irish playwright George Bernard Shaw wrote, “Success covers a multitude of blunders.”

British politician and historian Lord John Dalberg-Acton famously said, “Power tends to corrupt and absolute power corrupts absolutely. Great men are almost always bad men, even when they exercise influence and not authority: still more when you superadd the tendency or the certainty of corruption by authority. There is no worse heresy than that the office sanctifies the holder of it. That is the point at which … the end learns to justify the means.”

Ethics Violations by NBC News Anchor Brian Williams

Ethics Violations by NBC News Anchor Brian Williams In 2015, NBC suspended prominent news anchor Brian Williams after internal investigations revealed no less than 11 instances where he either embellished facts or bent the truth. Members of his team and NBC staffers who knew about these ethics violations chose to overlook because he was powerful. According to The New York Times,

Mr. Williams has been drawing 9.3 million viewers a night, and his position seemed unassailable. Even as the stature of the nightly newscast faded in the face of real-time digital news, Mr. Williams was one of the most trusted names in America … He was powerful. Williams had the ear of NBC boss Steve Burke. He was a ratings powerhouse. And he spent years overseeing TV’s most watched newscast. He was a winner, for himself, those around him and those above him—until it became clear the man who is supposed be among the most trusted in America had issues with telling the truth.

Power Corrupts the Mind

Brilliant men and women engage in morally wrong conduct simply because they can. They can get away with extreme pride, temper, abuse, and other disruptive behaviors because their spectacular success can and does cover many of their sins, even in the eyes of those at the receiving end of their crudeness.

Our high-achieving culture adores the successful, the powerful, and the rich. And part of this adoration is the exemption we grant these celebrities from the ordinary rules of professional civility.

Idea for Impact: The more people possess power and the more successful they get, the more they focus on their own egocentric perspectives and ignore others’ interests.

How Johnson’s Baby Powder Got Started: Serendipity and Entrepreneurship

1921 Advertisement: Johnson's Toilet and Baby Powder - Antiseptic Borated Talcum Powder

Making Fortunate Discoveries Accidentally

Alexander Fleming, the Scottish biologist famous for his 1922 discovery of penicillin, once said, “Have you ever given it a thought how decisively hazard—chance, fate, destiny, call it what you please—governs our lives?”

Serendipity is the accidental discovery of something that, post hoc, turns out to be valuable.

'Serendipity: Accidental Discoveries in Science' by Royston M. Roberts (ISBN 0471602035) The history of science is replete with such serendipitous discoveries. “Happy findings” made when scientists accidentally discovered something they were not explicitly looking for led to the discovery or invention of the urea, dynamite, saccharin, penicillin, nylon, microwave ovens, DNA, implantable cardiac pacemaker, and much more … even the ruins of Pompeii and Newton’s law of universal gravitation. (I recommend reading Royston Roberts’s Serendipity: Accidental Discoveries in Science)

In each of these instances, the crucial role of discovery or insight occurred in accidental circumstances. Therefore, we must understand serendipity’s role in terms of the circumstances that surround it.

Serendipity has also played a pivotal role in establishing many successful businesses. In fact, serendipity is a rich idea that is very central to the entrepreneurial process. As the following case study will demonstrate, many experimental ideas are born by chance and are often reinforced by casual observation and customer input.

Johnson & Johnson Got into the Baby Powder Business by Accident

Johnson & Johnson Got into the Baby Powder Business by Accident In 1885, entrepreneur Robert Wood Johnson was deeply inspired by a lecture of Joseph Lister, a British surgeon well known for his advocacy of antiseptic surgery. Johnson started tinkering with several different ideas in an effort to make sterile surgery products.

A year later, Johnson joined his two brothers to establish Johnson & Johnson (J&J) in New Brunswick, New Jersey. Their first commercial product was a sterile, ready-to-use, medicated plaster-bandage that promised to reduce the rate of infections after surgical procedures. As business developed, the Johnson brothers compiled the latest medical opinions about surgical infections and distributed a booklet called Modern Methods of Antiseptic Wound Treatment as part of their marketing efforts.

Within a few years, a doctor complained to J&J that their bandages caused skin irritation in his patients. In response, J&J’s scientific director Dr. Frederick Kilmer sent the doctor a packet of scented Italian talcum powder to help soothe the irritation. Since the doctor liked it, J&J started to include a small sample of talc powder with every package of medicated bandages.

By 1891, consumers discovered that the talc also helped alleviate diaper rash. They asked to buy it separately. The astounded J&J’s leadership quickly introduced Johnson’s Baby Powder “for toilet and nursery.” Over the years, J&J built on that huge initial success and created the dominant Johnson’s Baby product line with creams, shampoos, soaps, body lotions, oils, gels, and wipes.

J&J Got into the Sanitary Protection Products Business Too by Accident

Serendipity also played the key role in establishing J&J’s sanitary napkin business. In 1894, J&J launched midwife’s maternity kits to make childbirth safer for mothers and babies. These kits included twelve “Lister’s Towels,” sanitary napkins to staunch post-birth bleeding. Before long, J&J received hundreds of letters from women who wanted to know where they could buy just the sanitary napkins. In response, J&J introduced disposable sanitary napkins as part of its consumer products line. J&J thus became the first company in the United States to mass-produce sanitary protection products for women.

Clever Marketing Exploits the Anchoring Bias

Clever Marketing Exploits the Anchoring Bias

In the ’70s, psychologists Amos Tversky and Daniel Kahneman were the first to study a cognitive phenomenon called “anchoring” and its influence on decision-making. Over the decades, extensive research on anchoring has explained that the way and context in which we receive information profoundly influence how we synthesize it.

The effects of anchoring are very visible in marketing, sales, merchandising, and product pricing as it profoundly influences consumer behavior. By offering clever price contrasts, marketers can shape customers’ purchasing decisions. For example,

  • By offering lower prices and promotional sales, department stores induce customers to compare the sale price against the original price—the “anchor”—and think they’re getting a bargain.
  • By displaying shiny, expensive new cars in the showroom, car dealerships encourage customers to accept the prices displayed on their used cars or less flashy models.
  • Patrons at restaurants tend to order the second least-expensive bottle of wine in an attempt to avoid looking cheap. Therefore, restaurants tend to put the highest markup on that very bottle.

The Case of the $429 Breadmaker

Anchoring Bias: Williams-Sonoma $429 Breadmaker Customers are usually more likely to purchase a product when competing alternatives are included, as opposed to having only one product option.

Consider a classic example of this “single-option aversion” phenomenon. A few years ago, Williams-Sonoma couldn’t get customers to buy their $279 breadmaker. They cleverly added a spiffier-and-slicker deluxe breadmaker model to their product line for $429. While Williams-Sonoma didn’t sell many of the new and expensive breadmaker, they doubled sales of the original and less-expensive model.

When the $279 breadmaker was the only model available for sale, customers couldn’t tell whether the price was competitive because there was nothing to compare it to. By introducing a better product for a higher price, Williams-Sonoma provided an anchor upon which its customers could compare the two models; they naturally sided with the $279 model as an attractive alternative.

The Case of the $69 Hot Dog and the $1000 Chocolate Sundae

Anchoring Bias: Serendipity 3's $69 Hot Dog Usually, absurdly expensive premium goods are less of publicity stunts and more of strategic marketing tactics.

Consider the case of Serendipity 3’s menu anchors. In 2010, the popular New York eatery introduced a $69 hot dog called “Foot-Long Haute Dog” with dressings as exotic as medallions of duck liver, ketchup made from heirloom tomatoes, Dijon mustard with truffle shavings, and caramelized Vidalia onions to justify the high price. Of course, Serendipity 3 gained plenty of publicity when The Guinness Book of World Records certified this hot dog as the most expensive wiener of all time.

The true purpose of these ridiculously priced premium items is to make the next most expensive item seem cheaper. Customers who were drawn by the Haute Dog’s publicity gladly ordered the menu’s $17.95 cheeseburger. Even if $17.95 was too pricey elsewhere, Serendipity 3 customers deemed it reasonable in comparison to the $69 hot dog.

A few years previous, Serendipity 3 similarly offered a $1000 “Golden Opulence Sundae” that was only available with a 48 hour-notice. They sold only one Sundae per month. Nevertheless, this was just a shrewd marketing ploy to convince customers to spend more on high-profit margin desserts such as the $15.50 “fruit and fudge” confection or the $22.50 “Cheese Cake Vesuvius.”

Unsuspecting customers ended up paying too much for other meals at Serendipity 3 while believing they were getting a great deal.

Idea for Impact: Be Sensitive of Anchoring Bias

In both the above case studies, even if the companies sold almost none of their highest-priced models despite the publicity they generated, the companies reaped enormous benefits by exploiting the anchoring bias to induce customers to buy cheaper-than-most-expensive high-profit products.

In summary, anchoring exploits our tendency to seek out comparison and our reliance on context. The anchoring bias describes our subconscious tendency to make decisions by relying heavily on a single piece of information.

Call to Action: Sensitize yourself to how anchoring and anchoring bias may subconsciously affect your decision-making. If you’re in marketing or sales, investigate how you could use anchoring bias to influence your customers.

For more on cognitive biases and behavioral economics, read 2002 Nobel Laureate Daniel Kahneman’s bestselling Thinking, Fast and Slow. Also read Nir Eyal’s Hooked: How to Build Habit-Forming Products on how to influence customer behaviors and build products and offer services that people love.