Stop aping competition, focus on Customers

Different businesses focus on different aspects while developing Strategies to succeed in the market place. Some businesses focus more on out-competing the other players in their business. Some businesses focus mainly inwards – on improving internal operations. Some businesses focus more on their customers – on identifying what it is that the customer value and then on figuring out how that can be offered to the customer profitably.

The starting point of Strategy needs to be the Customer – instead of it being the Competition or the Company. The point may seem obvious; but many businesses miss it – as we shall see here.Let’s look at a few examples from various credible sources that strengthen this claim and try to understand the root causes of the non-customer oriented mind-set, and its implications for Strategy-building. Before, we start, it is important to note that I am not making a case for ‘sole’ focus on the Customer. I am, rather, arguing for using the Customer as the starting point of any Strategy building exercise. How exactly can a business sequence its Strategy-building process keeping in mind its 3Cs (Customer, Competition, and the Company itself), will become clear in the next paragraphs.

There are several examples of companies focusing wrongly on the Competition

Kenichi Ohmae, an ex-McKinsey Director, argues1 that Strategy should be less about beating Competition and more about creating value for the Customer. He argues that if one focuses on Competition, one gets in the trap of aping them: If they have cut costs, so should we; if they are advertising aggressively, so should we; etc. This leads to head-to-head rivalries and hence declining profits. In this article, he gives multiple instances where companies have made the mistake of focusing too much on aping and/or beating the competition.

> A Japanese company wanted to make a coffee brewing machine. It started its Strategy-building process by looking at the competition. It started by asking what its machine should be like – a GE-type machine or a Phillips-type machine. Kenichi argues that this is wrong starting point for a Strategy. It does not start by asking the question: What will the customer value?

> Several Japanese companies, during the late 1960s and early 1970s, chose to focus mainly on their competitors and started differentiating too much. This differentiation was not done keeping Customer value in mind – and led to too many models and gadgets. These companies then faced troubles when they eventually got stuck between low-cost South Korean companies and high-end European producers.

There are Indian examples as well of too much focus on the Competition. Here’s one such example form my own consulting experience:

> I was exploring consulting opportunity with an Indian KPO that wanted to launch a services offering. The VP Product development was of the opinion that all the company needed to do was to ape what the established players were offering. To him, the task was as simple as that. I declined working on that opportunity. In my view, one cannot make a Strategy just by aping the Competition. I think that is critical that one identifies a clear value proposition – one that starts from the Customer need gaps.

There are also examples of companies focusing too much inwards

> In their book Blue Ocean Strategy, authors Kim and Mauborgne mention that not all innovation is value-creating. They mention examples of Philips’ CD-I and Motorola’s Iridium that fell into the trap of mistaking technological innovation for an innovation that creates value for the Customer2. The managers in these companies revelled in the bells and whistles of their new technology – but could not attract the customer

> Japanese companies in the 1970s and 1980s rarely had strategies3. These companies were busy increasing operational effectiveness through practices such as TQM and Continuous improvement. However, as the gap in operational effectiveness narrowed, these companies started facing problems.

Consequences of wrong focus could be severe

> Unnecessary benchmarking:

1. Lot of companies tend to carry out a lot of unnecessary benchmarking when the focus should be on identifying how to create value for the customer – by improving internal operations and aligning them towards the value proposition

2. One of my consulting projects involved improving the Supply chain of a company. We ended up spending a lot of time benchmarking the company’s supply chain costs with its competitors. This was not a worthwhile exercise, as the two players were not exactly comparable, as the product mix was significantly different. So, those aggregate numbers on supply chain costs, as a percentage of total costs did not really give us any meaningful insights.

> Value-destroying Differentiation:

1. As we have seen in the case of Japanese companies in the late 1960s and early 1970s, lot of companies differentiate themselves for the sake of being different from the Competition. The customer may not value this differentiation at all!

> Creation of Red Oceans:

1. In their book Blue Ocean Strategy, authors Kim and Mauborgne argue that unnecessary focus on out-competing the other leads to highly competitive and unprofitable businesses (Red Oceans). They further argue that if businesses focus on creating value for Customers they can create new profitable market opportunities (Blue oceans)

The root causes of wrong focus

Authors such as Kenichi and Kim/Mauborgne clearly show that it is possible to make strategies that avoid head-on fighting with Competition. Why then do companies tend to react to competition? Why do companies fall in the Red Ocean trap?

Broadly, following could be the root causes of wrong focus

1. Porter’s legacy: One of the key root causes of this tendency is the mainstream Strategic thought. Porter’s thought on competitive strategy has emphasized creating sustainable competitive advantage more than creating value for the customer. Kim and Mauborgne note this point well in there book.

2. Avoidance of mental effort: It takes lot of mental effort to create a good value proposition. Lot of companies (e.g. the KPO example that I mentioned earlier) have a tendency to avoid this mental effort. Aping is easier on the mind. The avoidance of mental effort can also be seen among mom-and-pop stores that open up in a developing locality. People just enter the business following others – without thinking whether the need has already been filled or not.

3. Role of emotions: I also think that many business managers have an emotional tendency to react to competitor’s moves. They seem to be driven by fear and/or ego (e.g., if they do not react, they may be perceived to be weak, etc.).

Implications for Strategy

The implication is clear: Strategy needs to start with the Customer. The right ‘3C’ sequence of Strategy is as follows:

1. Customer: Assess the Needs of the target Customer segment2. Competition: Assess the Gaps based on what the Competition is offering3. Company: Devise a value proposition based on a match between business key success factors and internal competencies

One can use the above sequential framework to build the right Strategies for the examples discussed earlier. For instance, Japanese companies fearing the Koreans can now see that Korean companies already meet the low-cost need well. Hence, Japanese companies can explore other market gaps. This exploration has to start from the Customer. It may be found that Japanese can create a win-win with Koreans by collaborating. One may say that what if no such clear gap or a win-win is found. Well, I would pose a question back in such as case: Do you still want to be in this business? Can’t you do something more productive with your time?

There are ample success stories that have followed this sequence

1. Yamaha found the original piano industry to be declining rapidly. They tackled this situation by understanding customer need gaps, and created electronic pianos – which became hugely successful

2. Kao, a Japanese company studied customer needs meticulously and came up with a bathing water additive that simulated the effect of hot spring. It was so successful it wiped off all other products in one year. Kao paid more attention to creating unique value for its customers (e.g. by studying skin condition, hairs, circulation, etc.) than on beating its competitors.

3. Warren Buffet, in one of his interviews5, talks about an old lady whose business Buffet invested in. This lady ran a highly successful furniture business. The secret sauce of her business was simple – taking good care of customers.

4. Indian mobile handset company Micromax can also be thought of as one such example. Micromax has become successful by identifying customer need gaps and by meeting these gaps profitably. One of their first products was a phone with whole 1-month battery backup. This phone uniquely met the need gaps of Indian villagers facing regular power shortages!

5. Apart from the above examples, the book Blue Ocean Strategy is full of examples of companies that have offered unique value propositions to their customers

Summary/Conclusion

It is possible to have a profitable customer-oriented Strategy – if the focus is on value creation. Several companies have demonstrated this. The companies that have remained too focussed on beating the Competition have lost sight from their main goal – and have ended up eroding their profits. Therefore, the right Strategy-building approach is to start from the Customer – following the following sequence: Customer (Assess Needs), Competition (Assess Gaps), Company (Figure out how to plug these Gaps profitably)

References:

1. Kenichi Ohmae, Getting back to Strategy, HBR, Nov-Dec 1988

2. Kim and Mauborgne, Blue Ocean Strategy, pp 137

3. Michael Porter, What is Strategy?, HBR Nov-Dec 1996

4. Kim and Mauborgne, Blue Ocean Strategy, pp 234

5. Richard J. Connors, Warren Buffet on Business, pp 44