“People in any organization are always attached to the obsolete – the things that should have worked but did not, the things that once were productive and no longer are.”
― Peter F. Drucker
“Any man who can drive safely while kissing a pretty girl is simply not giving the kiss the attention it deserves.”
― Albert Einstein
Competition exists to choose who gets the prize when the prize can’t be shared. To prevail requires strategy. Business requires creating customer satisfaction and return on invested capital. The business environment is about competition. Securing profitable customers, suitable capital and qualified employees is not a consequence of happenstance; it is a consequence of strategy. The competition for customers1, capital or employees is typically a zero-sum game, there is only one winner. Every business employs a strategy though not necessarily explicit or successful. This issue of The Business Odyssey will share a few thoughts about competitive strategy.
Conceptions of competitive strategy stir up a muddy mix of meanings and expressions. Even the most casual reader of business literature cannot help but feel bombarded with theories about strategy touting success’s dependence on Big Data, Game Theory, Scenario Planning, Strategy Maps, Value Chains, Balanced Scorecards and a long list of other ideas. To be clear, all of these ideas as well as others can contribute significantly to a business’s efforts to achieve a competitive advantage. These advanced methods however, have limited value in the absence of a solid foundation of competitive strategy. My focus is limited to building that solid foundation. I identify and explain the basics necessary to produce a sturdy foundation that can support a sustainable advantage and when appropriate apply more advanced tools and methods.
Middle-market companies rarely need overly complicated or sophisticated strategy methodologies. These companies do nonetheless, benefit from understanding strategy’s importance, how to develop strategy and how to incorporate strategy into operations efficiently and effectively. A sound competitive strategy, effectively integrated into the business’s modus operandi, is unmistakable evidence of a business taking its maturation seriously.
Our goal is to construct a conceptual foundation for competitive strategy that produces meaningful advantages. To construct this strategic foundation we have devised a simplified process consisting of three steps: characterization, integration and validation.
Devising a healthy competitive strategy requires discipline, precision and attention to detail. The wisdom in the old saying – information is power – is revealed clearly in competitive strategy. I call the first step of strategy development characterization to reflect the initial emphasis on defining and clarifying specific aspects of the business. Characterization describes three things: 1) what the business does (outcome); 2) who the business does it for (customer); and 3) why the business is different (advantage).
What the Business Does (Outcome)
What the business does is a precise and accurate statement describing the customer satisfaction it creates. Relying solely on a description of a product or service fails to provide adequate insight into a customer’s underlying decision to buy.
Customer satisfaction is the measure of the business outcome; not the features or benefits of a product or service. The following example illustrates the difference between customer satisfaction and product description. When Intuit developed its personal finance management software Quicken it could easily have conceived it as an accounting program for individuals. Most individuals maintain a checkbook and avoid anything remotely resembling accounting like the plague. Offering an individual an automated solution for personal accounting is trying to solve a problem that most individuals don’t have or want. Individuals want to pay bills, keep their accounts flush, and balance their checkbook. And about once a year they would like to eliminate some of the burden experienced preparing a tax return. Intuit, focusing on customer satisfaction and not a “product description” created the automated checkbook – Quicken.
The satisfaction customers seek can take many different forms. And it is important that the individuals devoted to crafting strategy recognize and suspend personal bias, stepping into the shoes of their customer. Some customers may seek economic satisfaction in the form of low price or cost of ownership. Other customers may put higher importance on the value of time and hence look for usability, convenience, or reliability. A different customer may place more importance on status or prestige looking for rarity or perceived quality. Or the customer may value social responsibility found with such attributes as sustainable materials, chemical free, living wages or contributions to worthy causes. All of these are forms of satisfaction customers seek and all are legitimate.
Who the Business Does it For (Customer)
Customers are people. Markets are abstractions. Relying on demographic characteristics parsed from a seemingly attractive market produces an abstract composite caricature of an “idealized” customer. To the best of my knowledge, I’ve never actually met one of these people. Alternatively, conceptualizing a specific individual together with requirements and expectations reveals information that can be used to create a competitive advantage. Generalizing from the individual oftentimes produces unexpected markets. It doesn’t matter whether the satisfaction is delivered via product or service; or the customer is a consumer or institution. Every decision to buy is made by an individual (or perhaps several).
Using Intuit again, the company produced an automated checkbook that conveniently also relied on double entry accounting. A conventional market analysis would categorize this as a consumer product. However, Intuit discovered that many businesses in need of accounting software were staffed with individuals with the ability to manage a checkbook but not necessarily the specialized knowledge of double-entry accounting. QuickBooks was introduced as an automated checkbook for business.
Why the Business is Different (Advantage)
To prevail in competition requires an advantage. Securing consequential competitive advantage requires an understanding of what the business does and for whom it does it that is meaningful, effective and clear. Competitive advantage is the customer’s perception of value that makes the business different. Customers have the choice to select a competitor, a substitute, or to do nothing. Any one of those three choices means your business loses. So why will a customer select your business’s offering rather than one of these other alternatives?
It is well beyond my scope to attempt to catalog, much less discuss, the different ways to create a difference. Michael Porter2 describes three general competitive strategies: cost leadership, differentiation and focus. As an unapologetic Porter devotee I will use these three strategies to describe differences.
Cost leadership: an advantage the business achieves by its ability to offer its products or services at a cost less than a competitors. Using cost leadership as a source of advantage requires the business to tailor its entire way of doing business in a manner that allows it to maintain an overall cost structure that competitors cannot match. Contrary to popular thinking this does not necessarily mean that all costs need to be minimized or that cost reduction is the panacea for success.
Differentiation: businesses create competitive advantage when a customer can clearly perceive and value a difference. The complicating factor in devising differentiation strategies is the variety of alternatives and the temptation to do things that conflict. To illustrate a successful form of differentiation is the appeal to a customer’s desire for exclusivity or status; luxury cars are an easy example. Some customers seek products seeking to enhance an image of success or superiority. These customers will pay a premium for that privilege. I’ve seen on more than one occasion a business seeking to appeal to the status buyer but holding the steadfast belief that prices needed to be discounted compared to competing products. Big mistake. The status buyer is only satisfied with a product no else has, a discounted price may imply that the product will be accessible to everyone, defeating the purpose. This is not to say that pricing and cost management become unimportant. Quite to the contrary, pricing and cost management are always inextricably dependent on competitive strategy and require careful consideration. Premium pricing is not a license for frivolous spending.
Focus: Business can achieve a distinguishing and profitable advantage by focusing on a specialized segment of a market. Successful defense contractors employ specialized know-how pertaining to procurement processes, contracting, accounts receivable collections, and the appropriations process their customer use for future procurements. These companies build organizations that are profitably optimized to satisfy contracting requirements in an environment that is highly sensitive to cost. An interesting corollary is the difficulties successful defense contractors encounter trying to diversify and service private sector clients.
The Characterization stages identify the components of competitive advantage. Successful competitive strategy and the advantages it creates require that these components be fully integrated into the way a business operates. Consider as an illustration of operational integration the recruiting function. The business seeking an advantage as a leader in technology innovation requires the ability to recruit and retain the most innovative and smartest people with recruiting becoming a critical competitive competency. Imagine yourself in a space capsule preparing to launch; you don’t want to be thinking that you’re sitting at the top of all the low-cost bidders – not a reassuring thought. I would much prefer to think that the smartest people in the world worked together to produce the rocket I’m sitting on. Customers have their own requirements and expectations of what they are paying for and want to believe that whatever that expectation, the business is structured to perform better than anyone else.
The strategy of low cost provider is a good example to look at with a little more detail. Offering the lowest price is only the tip of the iceberg. The business not only needs to offer the lowest price it needs to do so in a manner that is profitable. I’ll have more to say about this in a moment when I introduce the business purpose. For the moment, a business pursuing a low cost advantage requires executives to dissect each activity or function of the business to ascertain how it contributes to satisfying its customers with the lowest cost. These activities include purchasing, paying attention not only to the cost of materials but also the costs associated with purchasing. This careful analysis might possibly reveal that paying more for a component can reduce manufacturing costs. There are countless trade-offs that must be revealed, analyzed and made.
Developing a successful competitive strategy requires understanding how each component influences every activity the business needs to perform from the obvious examples such as pricing, developing products and advertising to the not so obvious like recruiting, purchasing and accounting. Meaningful competitive strategy affects everything. Thinking otherwise will result in second place in an environment that only rewards first.
APPLYING THE BUSINESS PURPOSE
In the third issue of The Business Odyssey I introduced the idea of the Fundamental Business Purpose. All businesses need to create customer satisfaction and a return on invested capital. The competitive business strategy is viable only when these two conditions are satisfied. Adopting a strategy to be the low cost provider is not a license to operate without profits. The fundamental business purpose is a critical diagnostic of the soundness of a competitive strategy.
This issue of The Business Odyssey has focused on competitive strategy. This discussion, by necessity and brevity has been restricted to a narrow focus on establishing a few foundational concepts. It is by no means complete. The foundational concepts presented are introspective with a focus directed inwardly at operations. Meaningful competitive strategy cannot ignore competitors, suppliers, or other external factors. A future issue of The Business Odyssey will discuss the external business environment and the influence on competitive strategy.
1 The operational domains where competitive strategy has relevance are much broader than just customers. Throughout this article the term customer is oftentimes used, for the sake of brevity, to also include investors or prospective employees.
2 Michael Porter, Professor at the Harvard Business School, is in my opinion, the definitive author on business strategy. This does not demean the contributions of many other important writers however, I would advise anyone, with a reason to delve more deeply into business strategy, to start with Porter. As a consequence many of the thoughts presented in this issue of The Business Odyssey can be traced to Porter. Clayton Christensen, a Professor at the Harvard Business School, also deserves credit for his significant contributions to many of my views reflected in this article. Despite the appearance of blatant plagiarism my intention is to extract and apply sophisticated, complicated and proven ideas about competitive strategy to the middle-market businesses that have not fully embraced the importance of competitive strategy.