One of the pleasures of being an author who’s written several books is that you can occasionally go back and re-read previous works, and, if they are any good, it’s really surprising how much you can teach yourself! Today I picked up a book of mine I haven’t re-read for ages – it’s called Smart Strategy, and even though I say so myself, it’s quite fun!
This post concentrates on an early section whose message is summed up in the equation – superior strategy = different strategy. I’ve summarized and changed it a bit to pack it into blog-post size.
For a strategy to stand a chance of high returns, the decisions taken must be different from those taken by all competitors. Of course, being different does not necessarily mean being better. But for sure, being the same as another rival does mean not being better. Being different at least allows the possibility of being better. And being intelligently different, being courageous and not stupid, though it does not guarantee success, tips the odds nicely towards us.
To pursue intelligent difference, we need to find a competitive advantage.
Competitive advantage means that a business is better placed in its power alley than all rivals. The company has something that makes it markedly better. This could be a better product, or a simpler one. Or better service. Or lower cost and price. Or the best people in the niche or industry. Or the best brand reputation. But better always means different.
And for the difference to be lasting, it mustn’t be easily imitated. Imitation must be costly, or take ages, or both. By the time other companies have caught up, the leader should have moved on to something better again.
To be really different you have to do things differently. And to do things differently, you must have made brave and imaginative decisions that defy conventional wisdom. Sources of competitive advantage do not grow on trees. They must be created – you must create them.
Competitive advantage flows from being selective. Establishing and keeping competitive advantage ain’t easy. Doing it over a wide front is practically impossible. Doing it in a very focused arena is always the best place to start. To be different and better means cherry-picking. Few products. Few customers. Few activities.
Deciding what NOT to do is crucial. This opens the door to doing things differently, more simply, and better, for the chosen few customers.
So much for the abstract concepts. Let’s look at two examples of companies who have competitive advantage through being different – and more selective.
Southwest Airlines was the world’s first budget airline. It doesn’t follow the pack. It avoids large airports and routes that are long or convoluted. It doesn’t feed you or offer free drinks. It won’t ticket your bags to through destinations. It offers just one class. It doesn’t have lounges or other frills.
It does fly frequently to its chosen cities. It does offer quick, automated ticketing at the gate. And short check-in times. And very low fares.
It gears its investment and operating costs accordingly. It owns a standardized fleet of planes, initially 737s, lowering maintenance costs. It doesn’t pay travel agents and requires or encourages direct payment. It has very high utilization rates – full planes make low fares.
It’s different. It’s more profitable. And it has grown fast and become America’s largest airline.
You almost certainly know IKEA, the giant furniture and furnishings retailer. It has large, edge-of-town superstores, with masses of free parking. Self-service, not the usual escort of salespeople. Swedish design of low-cost, stylish, modular and usually flat-pack furniture, all its own brand, not masses of choice from third party suppliers. Self-assembly, not manufacturer construction. Instant availability from adjacent warehouses, not 6-8 week delivery times. Customers do their own pickup and delivery.
Yet IKEA offers extra services that most rivals don’t – long opening hours, crèches, kids’ play areas, cheap and cheerful restaurants, and free entertainment from clowns and magicians on holidays. All these services are cheap to provide or make a profit for IKEA. And all of them are geared to their target customer – young families who want affordable style.
Like Southwest Airlines, IKEA has pioneered a low-cost system that, for their target customers, is actually simpler and more convenient too.
OK, so you think you’ve got a good strategy.
Well, let’s see if you’re right.
- What do you do differently from any other player?
- What investments underpin your difference?
- What is your competitive advantage, precisely?
- What’s your value proposition to customers that they can’t get elsewhere?
- What are the 20% of your customers who make you more than 80% of profits?
- Who are your most profitable customers? At what rate, each year, do they leave you and buy elsewhere? Do you have a plan to raise the retention rate each year, and is it working?
- Who is your main competitor and what are its plans? For an equivalent product or service, what are your costs and prices compared to those of your competitor?
- What is your relative market share in each segment against your main rival? Are you the leader? What is the trend? Do you have star businesses – those where you are number one in market share and which are growing at least ten percent a year? What is the trend in relative market share (your sales divided by those of the largest rival) – are you gaining, holding, or losing? If you are not gaining, what will you do to ensure that you do?
- Do you really know, objectively, what your customers think about your most profitable products/services and your main rival in those products?
- What could you do to simplify your products, either to become much lower cost and price, or to provide products which are easier to use, more useful, and more fun to use than those of any rival?
- Who are the two or three possible new or minor competitors who could be eating your lunch in five years? How do you protect yourself against them?
If you can answer those questions – and the answers show you in a strong position – you have a good strategy. If not, you don’t.
A good strategy is essential for security, high profitability and cash flow, and high future growth. Few companies have a good strategy. Choose to be one of the few.