The Concept of Feedback Loops

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One of my classmates was a passionate chess enthusiast. His primary competitor resided in another country. This was during the mid-1980s, a time when tools like ICQ and Skype hadn’t yet transformed communication. Making international phone calls was prohibitively expensive, so my friend resorted to sending letters to engage in their chess matches.

Each move took weeks; he would receive a letter with his opponent's move, contemplate his response, write back, and then mail it. Such a leisurely pace of interaction felt normal four decades ago. However, in today's fast-paced business environment, we cannot afford to operate at such a sluggish rate.

The brain in the palm of your hand: a useful model - YouTube

This narrative takes us to about a decade ago in an Eastern European nation, where a major international chain was the leading player in the local Do-It-Yourself retail sector. Their stores, identical and rather unattractive in design, could be found in any large city, offering the lowest prices on a variety of products including flooring, paints, wallpapers, and power tools.

Despite the booming e-commerce landscape, the DIY sector remained largely untouched by online retailers. Industry veterans were convinced that consumers would never purchase items like ceramic tiles or lawnmowers without physically interacting with them first.

However, a daring new online startup, which we’ll refer to as XYZ, aimed to disrupt this notion. They initially started by selling only power tools but quickly expanded their product range. Each day, they gained more traction and popularity.

The established chain responded similarly to how Clifford Stoll reacted to the Internet boom in 1995: “No online database can replace your daily newspaper, nor can a CD-ROM replace a skilled teacher, and no computer network will alter governmental functions.”

Initially, the local branch of the chain ignored XYZ. Eventually, they deemed it unworthy of attention, and then, in a panic, they launched their own online store. The chain's local CEO, dressed in a costly suit, boasted at industry conferences, “We are not intimidated by e-commerce competition. Millions visit our physical stores daily. When we provide the same products and prices online, customers will choose us.”

Yet, the customers made a different choice—they favored XYZ. The chain's online store was not just subpar; it was dreadful.

The Power of Feedback Loops

The chain’s leaders made several errors in their online store's launch and operation. They attempted to manage it with the same strategies they used for physical locations, overlooking the fact that customers rarely visited multiple brick-and-mortar stores to compare prices, but online, they could quickly access numerous appealing offers.

However, their most significant misstep was elsewhere.

From an outsider’s perspective, large corporations resemble colossal dinosaurs. Their 'brains,' which are disproportionately small compared to their size, reside high up in the ivory towers of their corporate headquarters. When decisions are made at this level, it takes substantial effort to implement them throughout the organization. Even if these executives believe they have a handle on the situation, they often lack insight into the realities on the ground.

In contrast, the team at XYZ established a feedback loop that the larger chain failed to consider. They continuously experimented and received quick results from their initiatives. They adjusted their website's appearance, interface, promotional campaigns, product offerings, prices, and customer loyalty programs based on real-time feedback.

While XYZ made rapid improvements, the chain adhered to a traditional operational approach. They relied on quarterly financial reports that passed through numerous committees, accumulating excessive explanatory notes and presentation slides, before finally landing on top executives' desks weeks later.

In just a week, the XYZ team implemented more changes than the chain did in an entire year. A disgruntled customer complained on social media about the chain’s online store: “They lost my order, and it took me weeks to receive a refund!” Another customer chimed in, “They lost my order too, and I still haven’t gotten a refund!”

Feedback Loops and Strategic Choices

In September 2022, Uber's CEO Dara Khosrowshahi took to the road himself, working as an Uber driver to gain firsthand experience. While this is an excellent example of 'Going to Gemba,' executives cannot spend excessive time on the ground, as they have their own responsibilities.

Instead, they should work to minimize the information gap between decision-makers and those affected by their choices.

There are two primary strategies to achieve this:

1. Establish a rapid information channel.
2. Empower employees, granting teams autonomy, and allowing those who interact with customers to make decisions.

Your strategy could be a detailed plan or a concise list of core principles. In either case, an efficient feedback loop is essential for effective execution.

Bonus Insight

In today's business landscape, the most crucial concept boils down to one simple term: price. Price reflects the monetary value a company offers to its customers. When this value aligns with what customers perceive and meets their needs, a transaction is successfully completed.

The Book

You can download my book, Red and Yellow Strategies: Flip Your Strategic Thinking and Overcome Short-termism, for free—just subscribe to my newsletter for the link next Tuesday in the following article.

Additionally, check out: Your P&L Statement Misleads You: Learn to See the Core in Financial Reports.

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Dr. Dan Siegel's Hand Model of the Brain - YouTube