Visiting Brazil I came across an example of how a company can create a competitive advantage by focusing on a relatively unattractive market niche.
Embraer is now the third largest aircraft manufacturer in the world – much of its success results from its decision not to poke the 800 lb. gorilla (gorillas – Boeing, Airbus) in the eye. Embraer decided to focus on smaller commuter jets for short hops. This segment of the business was relatively small until worldwide deregulation caused this market to boom.
Is your strategy pitting you against 800 lb. gorillas – or are you differentiating? How you answer this questions will be key to how profitable you are.
Questions about how to differentiate your company? Please contact Denise Harrison at .
Customer preference is the currency that most of us in business seek. But what do we know about customer preferences – and how can we manage them, strategically? Most of us have a real blind spot when it comes to actually thinking like a customer and finding ways to set ourselves apart from the crowd in clearly discernible ways.
For an example, let’s consider how we behave as customers in the hotel industry. When most people choose a hotel, they will do it for one of six reasons:
Convenience (including Location)
Price
Type of lodging
Atmosphere
Service
Habit
That’s it. It’s not that complicated a decision, although having just the right combination of these six factors can be a complicated management challenge. Note that the last item, habit, usually arises because a hotel repeatedly satisfies two or more of the other factors. Also, some factors – such as service and atmosphere – can interact and either intensify the benefit of the other or detract from the other.
The reason that hotels are not all the same is that customers are not all the same. Some customers are far more interested in price than other factors. They routinely buy hotel rooms online, selecting by price, and may come to prefer a chain such as Motel 6 or Red Roof Inns. Other customers may have a strong preference for lodging with certain amenities, or a high level of service. They may tend to spend more time reading hotel reviews and might prefer a chain like Marriott or Wyndham. Top-end customers are willing to spend quite a bit extra to get everything – atmosphere, service, amenities and convenience. For these customers, “service” means more than “good service” – it means the hotel staff goes out of their way to make the guest feel welcome and appreciated.
Naturally, any hotel would like to offer the best of all of these to their guests, but each of these elements requires resources – both time and money. Some hotels try to move “up” a level by putting money into the property, décor, and higher end consumables like soap. These things do make a difference, but for the guest who expects convenience or service, they are not a substitute. Indeed, I have encountered business travelers who absolutely hate an otherwise fine hotel chain simply because the internet service is difficult to use, or because the check-in process takes too long.
A hotel can spend time and money on any of these factors, and many do. There is some efficiency in simply moving up from commodity to specialty strategies for quite a few hotels. The greatest efficiency, however, lies in cultivating habit with repeat customers. Once a specific customer has a hotel experience that fits closely to his or her ideal, the hotel has much lower costs getting that customer to book another room in the future.
The key to doing this in the hotel business – or any other business – is not to push on all fronts at once. No hotel embodies the epitome of all six factors. Rather, successful businesses in any industry are much more likely to find a substantial segment of the market and match, as closely as possible, the preferences of that segment. This is why there are certain clusters of strategy in the hotel industry, with two or three chains setting up properties and operations that look fairly similar to their competitors.
Interestingly, it is unlikely you will see a breakaway success in these clustered groups, because similar strategies tend to drive commodity behavior in the customer. Greater success can usually be found by pushing just a little farther towards one specific type of customer than your two or three closest competitors. If you are willing to endure a little pain and actually give up advantages that draw certain customers in order to appeal to your target customer, you may actually get a lock on that type of customer in the marketplace, and start to build a group of habitual customers. This effect explains the success of brands like Residence Inn, Four Seasons and Holiday Inn Express. Perhaps the best indicator of the success of these strategies is the eventual proliferation of copycat brands – which, of course, may lead to the necessity of pushing your brand even farther into your chosen segment.
The dynamic ebb and flow of customer preference can be a daunting challenge to companies that are used to resting on their laurels. Where is your company in this process? Are you trying to be all things to all customers or are you highly segmented? How will you know when it’s time for a change to that strategy – or when your strategy needs to be fine-tuned? Take the time to look at how your company matches up with your customers’ preferences, and you will likely start to pull ahead of your competitors. To read more about unearthing customer preferences please click here. (https://www.cssp.com/CD0912a/ListeningToCustomersForMarketShareGain/)
Events threaten us strategically for three reasons: They threaten our customers, they threaten displacement of our products or services, or they threaten our competitive position. Each of these types of threats contains an opportunity for innovation hidden within.
One of the most basic threats we face is one that threatens our customers. Simply put, some threats will diminish the customers available to us. In a business-to-business environment, this may be a threat to our customers’ markets. Consumer markets may be threatened by anything that reduces the customers willing to purchase our products or services. An example of diminished customer base would be a decline of alcohol sales due to legal changes or taste. The concurrent reduction in capital and supplies purchases by alcohol manufacturers would be a good example of this type of diminished customer base in a business-to-business arena.
The second type of threat is the threat of displacement. Simply put, this is a change that causes existing customers to meet their needs with an alternate product or service. A good example of this is the replacement of most film photography with digital photography.
The third type of threat is cost-based. Sometimes, outside factors may dramatically change the cost structure of an industry, resulting in diminished supply, higher prices or lower quality. Government regulation of the use of cyanide in manufacturing would be a good example of this, as would the effect of natural disaster destroying significant capacity in a supplier market.
Of these three types of threats, the first is the most difficult to turn into opportunity. This is because diminished demand is usually a choice made by the customer. If consumers choose, for example, to drink less beer, your beer-related sales are very likely to decline no matter what you do. In such situations, it is best to look for the “silver linings” that come with the cloud of diminished demand. The first is a likely change in the mix of competition – some competitors are likely to go out of business or greatly diminish. The second, which may be related in some cases, is the possible increase in specialty-related behaviors around your product or service. For example, if people choose to drink less beer, you may discover sales of specialty beers will gain a greater share of the beer market.
Displacement threats are easier to recast as opportunities. There are two important types of displacement-driven opportunities you may find. First, you may become part of the displacing dynamic, in effect destroying your old business in order to participate in the new business. When Sony embraced CD music as a replacement for cassette tapes, they were destroying their old Walkman Cassette product line in order to maintain a position in the ongoing market for music players. The second type of displacement-driven opportunity is to exploit the nature of the non-displaced customer. For example, as transistors replaced vacuum tubes in stereo equipment, a small portion of the market resisted the displacement, preferring the “warmer” sound of vacuum tube based amplifiers. By becoming a niche player specializing in the preferences of the high-end stereo enthusiast, a tube-based manufacturer could build higher margins and sustainable sales even in the face of a large-scale displacement of the vacuum tube.
Cost-based threats can sometimes be treated this way, as well. In many markets, the most externally visible changes based on cost can be exploited as opportunities to create visibly specialty-oriented products. For example, as competing motorcycle manufacturers shifted to alternate materials in the 1970s and 1980s, Harley Davidson leaned the other direction, refusing to replace steel with plastic, for example, and in some cases making design choices that preserved the older look and sound of earlier Harley Davidson models. While manufacturing costs became somewhat less competitive, the distinctive look and sound of a Harley appealed to the specialty customer who was willing to pay a significant premium for a distinctive motorcycle.
In addition to these examples, there are some basic questions you should ask when examining your threats for opportunities. First, why is the threat happening? Is it driven by customer preference, laws, or economics? How will these changes be viewed by the customer? Will all customers disappear, or will some stubbornly stick with the old way? If your industry moves, as a whole, to react to these threats, what advantages might accrue to a company that does not “change with the times”? Is there an opportunity to better serve a subset of the customer base by going against the flow?
These, and similar questions, can help you to uncover the upside of the threats you face in your business. If you are interested in seeing how we can help you to profitably adapt to the changes that threaten your industry, please be in touch! If you are interested in reading more on this topic please click on threats.
Leadership is a double-edged sword. On the plus side, leadership in your industry means that every possible competitor will have to play catch-up with any strategic choices you make – you will be defining the game of strategic competition, and this can lead to extremely strong profitability. On the minus side, leadership requires that you constantly push your company outside of its comfort zone. You won’t always know what to do – or even, in some cases, what you are doing – and you will end up making mistakes along the way. This is the main reason most companies fail to effectively pursue a leadership position – it is scary and bad things can happen if you do it wrong.
Author, Robert Bradford
The good news about strategic leadership is that the main perceived disadvantages are not real. This is not to say that leadership isn’t scary, nor is it to say that things can’t go wrong. Rather, those problems will exist whether you are in a leadership position or not! In other words – you will make mistakes whether you are leading your industry or trailing it. True, more people will notice the mistakes of the leader, but the sad truth is that companies that “play it safe” make just as many mistakes – and have the added disadvantage that the market never perceives an advantage to innovation “safety”.
So, if we accept the mandate to lead our industry, how do we pick the “BIG Things”? What really makes the difference between incremental innovation and industry-leading innovation? There are three main innovations that will tend to lead industries:
1. Innovation that is TOO DIFFICULT for most competitors.
2. Innovation that is TOO EXPENSIVE for most competitors.
3. Innovation that most competitors are UNWILLING TO PURSUE for any other reason.
If your strategic planning has helped you find a strategic competency that works in your industry, chances are that certain types of innovation you can pursue will fit neatly into at least one of these categories. This is because one of the great side-effects of competency-based strategy is that it leads organizations to focus on things that are easier for them and harder for competitors. For example, it is no secret that user-experience based design is a strong suit for Apple. What this means, strategically, is that Apple products may not always be the leading edge of what is technically possible – but the experience of using an Apple product will always be better. Why? Because it is more intuitive, simpler and has been designed for “feel” rather than features. Is it possible for a competitor to get this right, and effectively compete with Apple? Certainly – and in some rare cases, competitors can give Apple a run for their money – but at the end of the day, Apple will win at this kind of competition because it is now easier and cheaper for Apple.
If you want to compete effectively with Apple, you can do so by focusing your strategy on the things Apple doesn’t do as well – technical features, open-sourcing, and commodity pricing. This combination is exactly why Google’s Android operating system is so successful in competing with Apple’s iOS. It is not that one system is better than the other – rather, Android has strengths that would be difficult for Apple, and vice-versa. In terms familiar to those of you who have read Simplified Strategic Planning, iOS is dominating the specialty end of the market, and Android is dominating the commodity end. Make no mistake – the sheer volume numbers will favor Android – but the profit numbers will favor iOS.
To further dissect this particular example, let’s look at what the “big things” are in the cell phone market. What do users actually care about? Here is a short list of reasons why you might be satisfied/dissatisfied with a phone:
Style
Quality of service (i.e. no dropped calls, etc.)
Applications (i.e. what can I do with my phone?)
Ease of use
Price
Quality of components (i.e. camera, controls, etc.)
As you may surmise, it would be virtually impossible for one hardware manufacturer to win on all of these features. So is one of these the “big thing” in the cell market? The answer is no – any one or two of these items can qualify as a big thing when you are considering strategic leadership. The important thing is to develop the strategic ability to win so decisively that the market clearly acknowledges your leadership. This, just being a little better than HTC on quality of service will not yield a leadership position for Apple. Likewise, having one or two little design advantages over Apple doesn’t get you the style crown or the ease of use crown. It is only where the market perceives clear superiority that industry leadership results – and the benefits of true leadership only come after the market begins acting on that perception.
To see how this might play out in a different arena, let’s look at some very strange developments that are occurring in another market – television entertainment. Interestingly, some of the same players (Apple and Google) are taking a strong interest in this market. Also interesting is that there are two very clear channels for innovation – hardware and content delivery. As of the writing of this article, Netflix appears to be dominating content delivery through a strategic approach to content acquisition and marketing, but services such as Hulu and Xfinity are taking increasing market share. One could also argue that Google’s YouTube and Apple’s iTunes are also part of this market, since video content can be delivered by any of these channels. So – what are the big things you need to dominate in order to lead the video content market?
Content library
Pricing
Ease of use
Portability
That’s it. There isn’t much else that would drive a winner here. Netflix has the lead right now because their content library is great, but they are also very strong on portability (I can use Netflix on my iPhone, my Windows PC and my Nintendo Wii, and it doesn’t matter who my phone or broadband provider is). Apple gets pretty strong marks on ease of use, but isn’t necessarily a clear winner here since YouTube, Hulu and Netflix are all pretty darn easy to use. Leadership on pricing may turn out to be a giant-killer for someone who wants to de-throne Netflix, but success with this approach will take well-negotiated content and delivery deals along with a very large volume of users. Interestingly, many, many other players, including Intel, for some bizarre reason, are trying to gain a foothold in this business by becoming “virtual cable TV operators”. Without a strategic competency that can yield industry leadership in one of the big things, these me-too initiatives don’t stand a chance.
So who will come out on top in the video wars? Again, there is no sure bet. Apple is betting that integrating hardware with a content ecosystem will yield profitable, committed customers – and their business model does seem to prove that is correct. Google seems to be taking a more open-source approach, which, again, fits their competency and business model. Netflix will have to pedal harder and harder to stay in this race, and will face continued challenges from the owners of pieces of its downstream distribution system, such as cable companies. However, if they continue to lead on portability, there is a good chance that Netflix will retain market leadership in the foreseeable future. This is because portability isn’t even attractive to most of the big competitors in this space, with the possible exception of Google. You can, however, count on some of the distribution network players (such as Comcast), to attempt to use the power of their position to either gain traction with their own video offerings (like Xfinity) or gain some favorable concessions from the bigger players in this market.
How about your industry? Do you have a clear idea of what the big things are that you might dominate? How do those things stack up against your strategic competency? In my next article, I will discuss some ways to pick the big thing you focus on – and how to feel OK about letting go of the other big things.
Early in the PC era Apple was clearly a leader in innovation. But in 1996 Apple lost over $800 million dollars. Apple was originally known for breakthrough ideas for personal computers, but others were more profitable and had significantly more market share. What was wrong?
What was Apple’s Real Strategic Competency?
Yes, we all know that Steve Jobs, even with the management changes (Steve Jobs helps found the company, Steve Jobs leaves the company, Steve Jobs returns) was key to its current success, but let’s dig deeper to see if it is bigger than a single individual. Everyone’s vision of Apple was a company that made easy-to-use computers. But as long as the team at Apple thought its strategic competency was tied to PCs, it was in a rut, banging heads with tougher competition. But was the PC hardware/software combination really their competency? How could they know? Only by taking a deep look at the answers to the following questions could Apple rethink its true competitive advantage.
Does it provide high value to the customer? Well, the computer itself, not so much, but the intuitive human interface was breakthrough in its day. Competitors like Microsoft took the user friendly interface (GUI) idea and ran with it.
Does it differentiate you from the competition? Well, not during 1996; but how could the team use their “intuitive” understanding of human/machine interface to differentiate itself? The barrier to adoption of digital devices still remained “ease-of-use”.
Is it difficult to copy? Well, yes, folks did copy the Apple designs, but no one was able to innovate the way Apple can.
So what is Apple’s Strategic Competency?
Apple realized that it was good at making digital devices easy to use – not just PCs. It was able to take hardware and combine it with software that produced a device that even the digitally-challenged are capable of using. Yes, often the first release of any Apple product was plagued with bugs, but ultimately the products worked, allowing customers to interface with technology in ways they had never envisioned. Apple’s breakthrough products have included:
Macintosh
iTunes, iPod
iPhone
iPad
MacBook Air
Once the senior management team realized that the strategic competency wasn’t just about the PC, product development moved to solve different problems that could be resolved by using digital solutions and solving the “ease of use” problem. As soon as these devices were recognized as easy-to-use, markets expanded. However, in order to harness their intellectual capital fully, the team had to understand that the strategic competency was not about the PC, it was about the combination of hardware plus software plus “ease of use” know-how that really set them apart in the market place. Apple’s subsequent growth and success is now well-documented.
Evaluating Your Strategic Competency
In order to truly understand your growth opportunities, be sure that you truly understand what sets your company apart from the competition. Often teams look at just the traditional differentiators. Instead, you need to look at what is really setting you apart in the eyes of both your customers and competitors. Look at your major victories for the past several years. What made these achievements successful? Dig deep: break your triumphs down into the skills, processes and knowledge that allowed you to be successful–what did it take to get these projects to the goal line? A strategic competency will not simply be one strength, but rather, a combination of strengths (a combination of skills, processes and knowledge). Once you do this, re-evaluate your strategic competency; you may find it is different from what you originally thought it was, and like Apple you will be able to re-think your growth strategy.
Are changes in your industry right now or possible changes in the near future threatening your company? This can be a bad thing – but you might be able to turn the strategic threat into an opportunity, as well.
The most strategic threats occur because something in your value stream is undergoing a fundamental change.
The best examples, in recent years, have been changes brought about by technology. One is the impact of online travel websites on the travel agency business. Another is the impact of the cell phone on landline phone business. Technological changes are not always the cause of fundamental changes in an industry though. It’s possible for a shift in regulation or business practices to dramatically change an industry, as well.
Remember – when you are threatened by such changes, the changes will only occur because someone wants something to happen differently.
It may not be your company, or your competitors who want to see change, but strategic changes, as a general rule, tend to happen because a customer or supplier group either chooses to meet their needs in a different way or – in the case of regulation – are required to meet their needs in a different way. Thus, fuel-efficiency standards, which drove a greater use of plastic in automotive trim, led to changes in demand for chrome plating in auto manufacturing.
Almost always, these changes will seem like something you should avoid.
There is no longer a market for pay phone equipment, for example, because of consumer cell phone use. Furthermore, the use of electronic tax filing has diminished product demand for paper accounting forms. One of the most important lessons to learn here is that you cannot prevent the threat from happening. You can, however, control the rate of change that comes with the threat.
In some cases, the inevitability of a strategic threat means you must find ways to adapt to the new world.
Although many companies would just downsize, the strategy of becoming the threat calls for you to ask some fundamental questions. Is my company’s strategic competency limited to the current, threatened product (or service)? Otherwise, is there a competency that adapt to the newer, threatening product? Using this strategy, the tax form manufacturer would get into the business of writing tax software. As another example, a DVD video rental company would move into the business of renting movies online.
Obviously, this possibility isn’t always viable.
The pay phone manufacturer, for example, may find difficulty gaining the manufacturing expertise to make cell phones. A company that makes great internal combustion engines might not excel at making motors for electric vehicles. This can happen because the strategic competency which made your company successful is very closely tied to the old technology or practice which is being displaced. In such cases you should apply your relevant strategic competencies to less threatened markets. For example, the pay phone manufacturer might make airport check-in kiosks or automated teller machines.
For many of us, however, the strategic threat is not a fundamental threat to the existence of our company.
It is simply a threat to the way we used to do business. Upstart companies not married to the old way of doing business look for markets affected by such threats. It is not unusual to see a Netflix rising over the ashes of the videocassette/DVD rental market, for example.
How can we assess (a) whether our company can be the threat and (b) how to make this happen?
The key to both of these questions lies in our strategic competency. The way your company distinguishes itself by creating value for customers determines whether your company will be a nimble survivor or a has-been. To assess this, pay careful attention to the adaptability of your competency to the new world presented by the threat. If your competency is not too closely tied to the old way, you can probably jump into the new world. If the competency is closely tied, your strategic planning should steer you towards new uses for your competency.
So, let’s say you have a strategic competency that enables you to create value in the new world created by a strategic threat.
How do you make your company into the threat? Here are a few ideas from companies I have seen successfully make this jump.
Don’t delay getting any missing capabilities or technologies – acquire them if you have to.
Closely examine your company culture and push hard on adjustments that will drive your employees to embrace the new world.
Pay careful attention to compensation and other practices that may create incentives or disincentives to change.
Understand that some key employees will have difficulty making the change. Be willing to re-train them and even let go of them if they will become a drag on your agility.
Remember that the rules of the game may be changing fundamentally. Closely examine how you may need to change your strategic thinking to succeed in a dramatically changed market.
These aren’t the only ways to assure success at becoming the threat and surviving a shrinking market.
They are, however, the most common ways of fostering revolutionary innovation that will confound your competitors and delight your customers. If you’d like to learn more about strategic thinking and more specifically the importance of being the threat, Simplified Strategic Planning is a great place to start. For great ideas on how to improve the quality of your planning, contact me at rbradford@cssp.com. Consider holding a one-day workshop on Simplified Strategic Planning.
Robert Bradford is President & CEO of the Center for Simplified Strategic Planning, Inc. He can be reached at rbradford@cssp.com.
Dana Baldwin is Senior Strategist with the Center for Simplified Strategic Planning, Inc. He can be reached by email at baldwin@cssp.com.
Some of the most successful companies in the world experienced huge growth as the result of a game changing innovation. A few, like the Sony Walkman or the Apple iPod, were products, but others, such as Wal-Mart’s distribution system and Google’s search/advertising link, were fundamental shifts in business practice that redefined markets far outside of the innovator’s core business.
In strategic planning, it is always useful to consider the possibility of game-changing innovation. If you can instigate the innovation, or ride it to success, that’s great. Even if you can’t, though, you need to be aware of the possibility that it will become part of the competitive environment in your industry – and one that you need to be prepared for. Failure to prepare for a massive game change has doomed more than one otherwise successful business.
How do we cause, anticipate, or at least spot upcoming game changing innovations? And when we see them coming, how can we sort the real thing from those that will have little or no impact? To begin with, here are a few important characteristics of game-changing innovations:
1. Game changing product innovations almost always define a new category – whether it is “role playing games”, “MP3 players” or “non-stick cookware”.
2. All game changing innovations fulfill a critical unmet wish that customers have about the current status quo.
3. Game changing innovations usually seem impossible or unfeasible a short time before their introduction.
4. Real game-changers usually ride one or two clear changes in technology that make a new way of thinking about the product or process possible.
5. In mature industries, game-changes are usually driven by established players who are NOT in first place, while developing industries usually see their game-changes driven by second-movers.
The frustrating thing about these characteristics is that it is difficult for, say, your R&D or engineering people to sit down tomorrow and start working on the next game-changing innovation for your industry. Still, these attributes can be used to modify your strategic thinking so that you are more likely to generate the next game change.
The key to improving your odds in this arena is to modify your strategic processes to make game-changing innovation more recognizable and more likely. In particular, your strategic planning process can be modified to stimulate consideration of game-changing innovation – and to give such innovations more fertile ground in which to take root, when you do spot them.
The above characteristics are also reasons why companies often completely miss game-changing opportunities. Knowing these characteristics, the process of recognizing the possibility for game change in your industry should follow four steps:
1. Pay close attention to the needs and preferences in each of your market segments. Even seemingly impossible preferences (such as “instant shipping” or “real time information on orders”) should be listed.
2. When generating your perceived opportunities, make sure you consider ways your product or service could be used to define an entirely new category – or a way that an indirect competitor could service your customers’ needs in a completely new way.
3. Never discard seemingly impractical or unfeasible opportunities in the first phase of opportunity screening. Wherever you can find a champion, make sure you have one or two opportunities that stretch the limits of practicality in your opportunity screening worksheets.
4. Have one or two people on your team (and possibly a skilled outside strategist) who keep track of new technologies entirely outside your industry, so you can consider their application in your strategic planning.
5. If you are the number two player in an industry, pay special attention to ways you can change the rules for your customers and suppliers. Game changing innovation is EXACTLY what you need to take the number one spot!
Are you in an industry where the game could change in the next year, two years or five years? Make sure you take these steps in your strategic planning process to improve your odds of being one of the successful players – and avoid being one of the casualties!
Pricing can be very tricky in times like the ones we are going through currently. Too high a price and you can lose considerable volume, customer loyalty and market share. Too low a price could lead to diminished profits, commoditization of the brand or product/service and lower long term prospects. The key is to strategically determine the pricing band, which is best for your product/service in light of current conditions.
To do this, you need to determine where your products and services are positioned in your market places. Each one of your offerings needs to be analyzed in terms of where it is located on a spectrum from pure specialty to pure commodity.
We define a pure specialty product as one, which is priced to take advantage of the uniqueness of the product or service. Key characteristics of a specialty product or service include:
Unique “product” or “packaging” – “packaging” equals services wrapped around the product/service offered
Market perceives clear superiority of the product or service provided
Sales result from having the right product at the right price
Strong margins/profits on each individual sale
Value-based pricing – taking advantage of what the market and competition will allow to maximize profitability
Exceed customer requirements – providing the extra services which add perceived value
High level of customer support – to keep the perception of value valid
By comparison, a commodity product or service has very different characteristics. They include:
Little differentiation between products/services offered by all competitors
Substitutability – One company’s offering is little different from another
Sales result from low price
Weak margins/profits due to tight margins
Competitive pricing in order to gain market share
Meet customer requirements – no added services can be afforded
Order taking – because there is no budget for added services
Almost all products and services have some of each characteristic – commodity and specialty. The challenge is to determine the behavior of the specific product or service in each market in which it competes. You need to determine where each offering is located on the spectrum between pure commodity and pure specialty. You also need to determine what the overall characteristics of each market segment are, to see where you are competing. For example, are you providing a specialty product in a mostly commodity market? Entirely feasible to do, but you must know this or your pricing could be hurting your profitability by being too low.
An example of this is windshield washer fluid (appropriate for this time of year). This is basically a commodity market, with the majority of sales of the blue fluid centered in a narrow band within a few cents of each other. There is a specialty part of this market, however. Some people buy the green version, which contains more alcohol and more soap, allowing better functioning at lower temperatures and with the ability to clean the windshield better. The price of the green fluid is considerably higher, due to the higher performance and specifications. This green fluid is a specialty item in a mostly commodity market. If the vendors of the green fluid were to price their product at or near the price of the blue fluid, they would be leaving money on the table.
By properly understanding the positioning of their product, the makers of the green windshield washer fluid can keep their profitability higher and keep their perceived value high to command the higher price.
Some additional thoughts:
Pricing policy is one of the most strategic issues that a company can deal with-both for the short term and the long term. It is tied to market strategy (expand, maintain etc.) e.g., do we need to buy our way into a market? Do we need to do some pre-emptive price-cutting to make a market a competitor is eyeing less attractive?
In custom manufacturing, cost-plus std. margins can be the kiss of death. You either over-price and lose the business or leave money on the table and get the business.
Competitive intelligence needs to feed into pricing as well.
You may want to take a look at Tom Ambler’s 2-part article “Mining Your Unexploited Value”. It offers a process to address the pricing issue.
M. Dana Baldwin is a Senior Consultant with Center for Simplified Strategic Planning, Inc. and can be reached at baldwin@cssp.com.
One of the intractable problems of economics is that first-time buyers bring a lot of uncertainty about the value they will receive to a transaction. An excellent example of this is to compare the sale price of new electronic items on eBay with those at an online retailer like Amazon.com – inevitably, the individual sellers on eBay will be selling the same products at some discount to the prices on Amazon. This happens because most online buyers have some experience buying from Amazon – and no experience buying from a specific eBay seller (of which there are thousands).
Your company faces this same “value uncertainty discount” when selling to a new customer for the first time Your customer, never having experienced doing business with you, does not know much, if anything, about what that experience will be like. Will you be accommodating or difficult? Will you be generous or nickel-and-dime the customer? If there are issues, how easily and quickly will you handle them? In many markets, these are not trivial questions. Indeed, for customers in some markets, the answers to these questions are more important than some of the basic features of your products or services.
Imagine you are a customer who is looking to switch suppliers – or establish a new supplier – for a given product or service. If you have no way of establishing confidence about the utility of the relationship with a given vendor, you are very likely to discount it entirely. This can lead to very commodity-oriented buying behaviors, which isn’t really in anyone’s long-term best interest. The smart customer, then, starts looking for signals that you might offer more than the basic product or service.
Here are a few clues that people commonly look at when trying to establish value:
Referrals from other customers – perhaps the most credible clue
Guarantees
Price (higher price signals more quality/service)
Quality and responsiveness of sales support
Appearance of “packaging” – including sales literature, and possibly even your plant and office
There are more – but this list should give you some ideas about how you may signal higher value to prospective customers. Clearly, it is the function of your marketing to address how you will signal this value – and it one of the primary tasks of strategic planning is to assure that other elements of your business, such as finance and operations, reinforce that value in execution.
How do you signal value to your customers in your marketplace? More importantly, is this signal any different or more credible than your competitors? Strategic planning is an excellent time to consider how to set yourself apart from the competition in this way – and having your human resources, IT, customer service, operations and product line support this vision is a wonderful way to increase the strategic muscle and staying power of your business.
It can be difficult to compete with larger companies. To many, they seem to have all the advantages and no disadvantages. There are several reasons why larger competitors make tough competitors. This week, we’ll examine the advantages and disadvantages of the larger competitor, and how you can use them strategically to build more profitable business.
Why it is harder to compete with larger companies
First, from the competitive analyses we use in Simplified Strategic Planning, these are the most common advantages cited for larger competitors:
More resources
They aren’t just bigger – they have more of everything. Multiple locations, more people, more cash. This one can really feel tough sometimes.
Bigger network
Larger companies have more suppliers, more customers, more shareholders, and often a better developed network supporting their success.
Purchasing economy
If suppliers offer discounts for volume, the big competitor is more likely to get the best discounts, which leads to cost advantages. Most larger companies use cost advantages as a big stick to beat their smaller rivals.
Location advantages
If you are larger, you can have multiple locations and distribution centers that are strategically located to improve both cost and time performance.
Depth of skills
With more employees and greater size, these companies also have the ability to support very specific skills that smaller companies cannot afford.
With these advantages, it makes sense that competing with larger competitors can be a big challenge. It’s not unusual for a smaller competitor to have costs that are near or above the lowest prices offered by larger competitors, especially in heavily commoditized markets.
Advantages of being the smaller company
How can a smaller business hope to compete with all these advantages? As you might suspect, being smaller also brings several advantages.
More nimble
The smaller company, with a smaller footprint, can change directions much more quickly.
Less need for volume to absorb overhead
Reaching your breakeven point can be a challenge when your overhead is higher. For smaller companies, it’s often easier because the small company isn’t supporting everything the larger competitor is trying to cover.
Closer to the customer
While economies of scale do come with size, size also can further separate the customer from key parts of a business. Routinely talking with customers is nearly universal in smaller companies, while their larger competitors may have layers of management between the customer and key decision makers.
More focused
A smaller company can do quite well with decent market share in a small market. The larger company needs to reach a higher gross revenue, and so needs more customers to sustain the business.
The best ways to compete with a larger company
For the smaller company, the good news is that there are plenty of examples of smaller companies holding their own that we can draw from. When taken as a whole, smaller companies tend to succeed when they pursue the following strategies:
Specialty strategy.
Low volume can be very profitable if it comes at a higher price. While this means you may have to cater to more of the customers’ preferences, it also means you can be the best at the top level of quality, service, innovation or any other attribute your customers find valuable. A specialty strategy – targeting customers whose primary preference is not price – is the most common winning strategy for smaller companies.
Segment focus
Having an entire business built around a subset of the market may limit your size, but it also is much more likely to lead to strong market share, even when there is a large competitor who wants that business. The smaller company can succeed by orienting every part of the business to serving the segment of the market, while the large company needs to be able to serve multiple segments to reach their volume targets. Having a better, more focused market segmentation is a simple but successful way to beat the larger competitor.
Moving faster
Chasing changes in the market – or even pushing those changes – makes a lot of sense if your company is more nimble. This may mean focusing on innovation in products, service or even distribution. In a similar vein, the smaller company may have a greater ability to move in and out of markets as they change.
Real customer intimacy
Because the smaller company is usually closer to the customer – and is often more focused on a subset of the market – it’s possible to truly understand the customer better than larger competitors. This is not just true in sales – all parts of a smaller company can have more contact with customers. If you have a greater ability in this area, use customer intimacy and highlight it in your sales and marketing.
Finally, there is a general mindset that will usually lead to better competitive strategy for smaller companies: always be looking for ways to capitalize on the strengths of being smaller while avoiding the strengths that your larger competitors have.
If you’d like to learn how to use your strategic planning process to better compete with a larger company, we highly recommend you sign up for our 5-session Simplified Strategic Planning Seminar. This super-dense program tells you exactly how to apply the ideas in this article, and is full of tips to make your strategic planning work better than anything you’ve tries before.
If you have attended the Simplified Strategic Planning seminar or read the book, you are probably already familiar with the concepts of specialty and commodity customers. Simply put, specialty customers are those who perceive premium value in a product or service and are willing to pay for that value, while commodity customers choose based on price. While many make the mistake of assuming the terms specialty and commodity refer to the product or service, they are actually indicators of customer behavior. Almost all markets show some of each type of behavior, and this creates strategic opportunity for companies seeking to build competitive advantages.
A good depiction of the split between specialty and commodity behaviors in a market is what I call the “fried egg diagram”. In this diagram, the yolk – the center part of the egg – is the part of the market exhibiting specialty behavior and the white is the part showing commodity behavior. In most situations, I expect a market to show a fairly typical split between these – between 20 and 30 percent specialty, with the rest being commodity.
There are markets with exceptional splits between specialty and commodity behaviors. For example, very basic food items like bananas and flour tend to be purchased on price alone by most customers. Even more extreme, carload quantities of raw materials like wheat or coal are traded as commodities on exchanges, where price is the critical feature and uniformity is expected. Such markets are almost all commodity and exhibit a very small center of specialty behavior.
The opposite is also true. High end luxury product types may exhibit very little market for the cheaper version because customers assume there is a correlation between price and quality. Additionally, a service like health care is likely to have extraordinarily little commodity demand because quality is almost always a preference in a critical personal service.
It is important to understand the nature of specialty and commodity behavior in your markets. If you are the smaller player in the market, it is likely the specialty customer will be better suited to your success, since economies of scale create significant advantages for your larger competitor. If you are the larger competitor, some commodification of your market may improve your share, since you have the advantage with customers exhibiting that behavior.
Another feature of the specialty/commodity split is that it is only a binary split in smaller markets. If you have 10 potential customers in your market, you probably know which ones show more specialty or commodity behaviors. There are less likely to be customers who straddle the fence between the two, because they are seeking to match their suppliers with their strategy. Most cases of customers in small markets who seem to straddle the specialty/commodity divide involve situations where there is disproportionate power in the hands of just a few customers. Powerful customers will demand both specialty treatment (high quality and service) and commodity prices, because they can.
In situations where customers are less powerful, such as most consumer markets, you may find larger numbers of “in-between” customers. In large markets where this occurs, you will almost always see the market split into three or more ranges, such as “high end”, “mid-range” and “budget”. As an example, there is some delineation of these categories in the automobile market, because there are millions of purchasing decisions every year. You are unlikely to see a customer trying to choose between a Kia and a Lamborghini simply because there are plenty of competing vehicles clustered around the different types of customers.
In looking at the fried egg diagram, these large markets with less powerful customers exhibit a more fuzzy boundary between specialty and commodity. Dramatic feature differences or price differences may lure the “in-between” customers to cross the line between these two behaviors, while some customers simply bounce back and forth based on their situation.
When seeking to understand your markets, rather than denying the existence of specialty or commodity customers, you may wish to take a little time to create and think about a fried egg diagram. It often helps clarify strategy, and will almost certainly shed some light on your competitive position in the market.
If you would like to apply this and other competitive strategy tools in your strategic planning, check out our program on Simplified Strategic Planning, which is available online and as an in-house training program for your executive team.
When most people are traveling on a highway, stopping for fuel or food involves an interesting decision making process. We often exit the highway and look for a restaurant or gas station that will meet our needs. Naturally, a strong brand preference may cause us to choose one exit over the other, but, without a strong preference, many people will simply look for the store that is closest to the exit. Because of this, being closer to a highway exit makes a store more convenient for many of the travelers who are driving through an area. This geographic proximity is an example of dimensions of competition.
This decision making process is important because it shows us the effect of dimensional competition in a very physical way. Look at any interstate exit and you will likely see one or two gas stations and one or two fast food restaurants. These businesses have correctly identified convenience as a key dimension of competition, and the ones closest to the traveler are likely to be more successful. When measuring convenience, the customers of these businesses assess distance to the highway as a key criteria, so the Wendy’s that is near the exit will be seen as more valuable that the Bob’s Burgers a little farther away. Thus, the successful stores will cluster around the exit, and most customers will factor that into their choices.
We see this effect in strategy all the time. Price is the most easily perceived dimension in most markets, so there is a cluster of businesses pushing to be at the lowest price. This is one of the main reasons why the commodity strategy is far more difficult than it looks. Just as there can only be one restaurant that is the closest to the exit, there also be only one lowest price competitor. In general, when two or more competitors start to cluster around a single dimension of competition, one can succeed by being a clear leader in that dimension, and the others can only succeed by standing out in other dimensions.
This dimensionality is most apparent in consumer products, where brands can sift through data and identify small subgroups of customer behaviors driving millions of sales. Because of this, there are paper products that target latinos, airlines that target business travelers, and television networks that target white men over 50. One key concept we need to understand for strategic planning is that large groups of customers can be targeted through multiple dimensions, while smaller groups will sort out differently.
If you are in business-to-business sales, you are likely working with smaller groups of customers. Selling to auto manufacturers gives you a pool of ten to twenty customers, not ten million. This is why the b-to-b equivalent of products targeting single women in their 20s doesn’t exist. Instead of nuanced style differences, business to business markets often boil down to competition on price, quality and speed.
In strategic planning, it’s vital that you understand the dimensions of competition in your markets. Customers that consider price the primary dimension will be commodity customers, of course. But what about the other dimensions? Do your customers want to look smart, be safe or have multiple choices? Each of these can be a competitive dimension, and there will be a successful player for each dimension that supports enough sales to sustain a supplier. While we use specialty strategy and commodity strategy to represent competition built around one dimension – price – there are many other dimensions that can be important when creating a specialty strategy.
If you want to successfully identify the dimensions of competition that can lead to your success, a good understanding of market behaviors and your strategic competencies will make you far more successful. Contact us to find out how a structured, data-driven strategic planning process will drive up both profitability and market share for your business.
Visiting Brazil I came across an example of how a company can create a competitive advantage by focusing on a relatively unattractive market niche.
reasons why larger competitors make tough competitors. This week, we’ll examine the advantages and disadvantages of the larger competitor, and how you can use them strategically to build more profitable business.
A good depiction of the split between specialty and commodity behaviors in a market is what I call the “fried egg diagram”. In this diagram, the yolk – the center part of the egg – is the part of the market exhibiting specialty behavior and the white is the part showing commodity behavior. In most situations, I expect a market to show a fairly typical split between these – between 20 and 30 percent specialty, with the rest being commodity.