Strategy Musings: To be better or be different?
How a firm positions itself determines how customers view it. In a competitive marketplace, the positioning of a firm and its actual performance determine how it fares against others in terms of market share and profits. Broadly speaking, there are two fundamental ways in which a firm could position itself.
(A) Be better.
Most organizations compete and survive in this mode. Given the characteristics of products and services it offers, the market segment it serves, and the state of competition, a firm decides to compete on a set of performance indicators/dimensions that it believes will bring it more customers and revenues. In other words, the firm’s strategy is to be on par or better than competitors on those indicators. The indicators on which it is better than others, become its differentiators. It hopes its superior performance on these indicators (or differentiators) will be viewed favourably by customers and consequently its market share will increase. In other words, the firm would like to see its differentiators become ‘order winners’. As long as that particular set of differentiators remains important for customers and the firm is able to maintain its edge on them, it is likely to sustain its competitive advantage over time.
Several strategy gurus talk about two distinct competitive strategies — cost leadership and product differentiation. This implies that in certain market segments firms compete primarily on cost, whereas in others they compete on product design and quality aspects. That might be true in certain situations but the reality in many industries and market segments is a bit grey and more complex.
The set of order winners for a market segment often contains multiple performance indicators/dimensions. For example, both cost and retail level availability are crucial order winners for a consumer goods manufacturer or a retailer serving middle class customers. The competing firms in these industries try to do well (and outwit each other) on both indicators. A firm that is viewed to perform superior on at least one of those indicators creates differentiation. If the performance of two or more firms is seen by customers as similar, the differentiation diminishes and competition intensifies. In such a cut throat scenario, some firms attempt to resurrect differentiation by enhancing performing further on an indicator from the original order winner set or by performing better on a new indicator (such as certain aspect of customer service) with the hope that the latter is likely to become an order winner as well.
Since the firms serving similar market segments compete on a common set of performance indicators and the ones that are perceived to perform better on some of them are preferred by customers, ‘benchmarking performance’ is a typical practice by which individual firms compare themselves with others and set targets for improvement. This is how efficiency and overall technology and performance of products and services improves with time. When a firm develops a way to improve efficiency and reduce cost, that according to Christensen, is ‘efficiency innovation’. When a firm develops ways to improve performance on aspects such as product design, quality, speed and customer service (targeted at higher-end markets), Christensen calls them ‘sustaining innovations’.
Let us look at some examples. For a large firm producing standard steel products in bulk using integrated steel making process, such as Tata Steel, low cost and high volumes are important. This is because there are several medium-to-large steel makers of standard products, and their customers expect competitive prices and many of them place large orders.
A large FMCG firm such as Unilever sells a large variety of brands of consumer products for personal care, food and home care for different market segments. For large volume middle class segment products, such as Lifebuoy and Knorr, they compete on cost and fill rate (or availability) at many widely distributed retail stores. In these mass product-markets, it faces competition from both large multinational and national firms like itself and smaller regional and local players. On the other hand, Unilever also sells relatively premium products like Dove that are positioned for quality (of product and packaging). Retail level availability is crucial for these products too, but at fewer stores located in higher income upper-middle class areas. Here the competition is from similar large multinational and national scale firms that sell their own premium brands. Retail availability and consumers’ perception of product quality and packaging are what these competing firms are compared on, and the ones perceived to be better gain higher sales.
e-commerce firms delivering quick grocery and other consumer products, such as Bigbasket Express Delivery, Swiggy Instamart and Blinkit, try to differentiate and perform better on delivery time, besides offering competitive prices.
Automakers Tata Motors, Mahindra, Maruti Suzuki and Hyundai offer a range of passenger cars and SUVs. At the affordable end, they have models like Tiago, KUV, Bolero, Verito, Alto, Wagon R and Santro that are pitched to lower-middle to middle class customers. While making buying decision, a customer would compare them on price, fuel economy, and cost and accessibility of after-sales service. At the higher end, these firms have products like Nexon, Safari XZA, Ssangyong Rexton, Alturas G4, Kizashi, Tucson and Kona Electric, and they compete on luxury design-quality features of styling, handling, safety, special performance aspects such as acceleration, and preferences of specific sub-segments within high-end customers such as environment friendly technology.
In all these examples, the competing firms serving a similar customer segment are compared on a common set of performance indicators. These set of indicators influence customers’ buying decision, and therefore, are order winners. The firms that differentiate on some of these order winners by consistently performing better on them, or creating an impression among customers of doing so, gain revenues and market share.
(B) Be different.
There are some firms that stand out in a competitive marketplace by distinguishing themselves with a unique positioning that most other firms in the industry do not have. The combination of value-adds they bring on the table in the form of services, products and processes provide the customers with a distinctive and delightful experience. In this case, the firm differentiates itself by its unique offerings. Other (or most of the other) firms serving similar customer segments do not offer that experience but compete by trying to ‘be better’ on conventional performance indicators. There is little to compare this particular firm with others on. It attracts customers by virtue of standing out in ways that offer them good experience, and that is what it cares about. Such firms are ‘innovative’ in an interesting way. Their innovation often comprises a combination of multiple elements such as particular products, services, processes and technologies, and crucially, the way they deploy that combination to serve customers. Typically, such a unique and successful combination of elements is called ‘business model innovation’.
Often, such business model innovations compete against non-consumption and expand the market by bringing new customers in the fold. They do so by making products and services more simple, accessible and affordable, and targeting lower-ends of markets (which is also a reason why leading firms in the market with older and different business model do not feel threatened and often ignore the newbies). Those new products/services might also have lower performance on quality and other dimensions, however they attract low-end customers who find them convenient and who do not have other (or better) options. Over time, their performance improves and threatens (and disrupts) dominant incumbent firms. Christensen calls them ‘disruptive or market-creating innovations’. However, ‘competing against non-consumption’, ‘affordability’ and ‘lower-end of market’ do not seem to be the case always, and there are exceptions such as Apple’s products.
If a firm’s unique offerings make it successful in the marketplace, other firms will try to imitate its strategy. Hence, over time, that firm’s distinctiveness might erode as other firms successfully copy its business model. Over time, the firm would, therefore, have to either keep innovating new elements in its offerings (that is, modify its business model) or become content with being less distinctive and switch to competing by being better on conventional indicators.
IKEA is an example of a firm that stands out as different from others. While it may not be the best on any one performance indicator, it offers a combination of value-adds — retail store’s try-out-yourself and do-it-yourself experience, moderate prices, large variety of finished product/assembly combinations, and reasonable quality of material — that provides a somewhat unique and exciting experience to a lot of customers. This combination is achieved by retail store design, highly modular product designs that permit repetitive manufacture of standardized components and efficient supply chain processes together with large variety of assembled products, and choices of materials and shapes of components that economize logistics and assure product quality.
Apple has a distinctive positioning based on its specially designed products that, together with apps and online marketplace, offer pleasurable experience to users. Apple achieves this by bringing together its technological expertise in multiple domains and its unconventional processes of market research and product design.
Uber and Airbnb are other examples of innovative business models. They have combined elements of digital technologies and service processes to offer uniquely delightful experience to customers.
Or, to take an old example, when mini steel mills came in at the low end of the steel markets and disrupted integrated steel makers by offering a combination of low cost, viability at small scale, and no (or little) constraints on location tied to raw material. Or, when transistor technology based simpler and less-expensive products such as radios and televisions (introduced by Sony, for example) disrupted vacuum tube technology based products that were dominant at that time.
