Don't let dubious business terms confuse you

There are only six ways to develop a company

And things called “strategies” may have nothing to do with it

2001 became the last year in history when the global sales of the photographic film raised. In the following year, the sales started to decline — at first slowly, then sharply. The era of digital devices dawned. At that time, the photographic film market was divided between two companies — Kodak and Fujifilm. Despite some speculations in the media and in some books, both firms were led by competent managers able to think strategically. They saw the industry’s future clearly, and both enterprises’ leaders launched diversification programs to find new ways to earn money in the digital epoch. Kodak invested in solutions for photo — digital cameras, booths for printing pictures, websites for exchanging them, etc. — and, as you know, the company failed. In FujiFilm, they opted for other solutions — the company’s leadership built its future around films and technology — and they kept afloat and then succeeded.

This case is so well-known that I frequently discuss it in lectures and consulting projects. Often persons I talk to use this example to disprove my customer-centered approach to strategy. They insist that as long as Kodak tried to create new customers’ values (the concept I advocate almost in any article), Shigetaka Komori, the then Fujifilm’s CEO, made an inventory of technologies the company possessed to find new market niches where they can be successfully employed, such as medicine and cosmetics. It may seem that Komori didn’t care much about customers’ needs. As those commentators say, Komori made his decision “based on assets, not customers’ values”, but that is not true.

According to some data, not more than 1% of technological patents get commercialized. So, technology itself is not a basis for a prosperous business. Technology only bears fruit if it helps a company create customers’ values. So, at the end of the day, everything gets back to a customer anyway. For example, the touch screen technologies helped many companies thrive, but only because customers love touch screens for the naturalness of the gestures needed to control a device. Fujifilm could accompany Kodak on its way to oblivion if Komori offered the customers cutting-edge technologies they didn’t need.

Michal Porter and Igor Ansoff proposed their famous strategic decision-making approaches in the XX century. Both can be visualized as the 2*2 matrices and imply that a company leadership needs to choose from four “strategies” depending on some conditions. BCG came up with the Strategy Palette concept consisting of five options (“strategies”). You might have heard of “M&A strategy”, “diversification strategy,” or “market leadership strategy”. I am often asked about what “strategy” a company should choose due to its market position and other circumstances. As if there is a list of possible strategies somewhere and the only thing a company’s leadership should do is to choose the right one (and such lists exist and can be found on the Internet). And I believe that thinking this way may be dangerous for entrepreneurs and top executives.

Only one way a firm earns money is to satisfy customers’ needs by creating exceptional values for them.

Every business organization has clients.

Clients have needs.

A successful company can identify these needs.

A successful company can fulfill these needs by creating customers’ values.

It is obvious indisputable that a firm’s leaders need many other things to do this job. They deploy assets and allocate resources. They build a culture, launch projects, and improve business processes. But everything starts with customers’ needs and customers’ values. If a company does a bad job of identifying needs and creating values, perfect processes and expensive assets won’t help much.

So, if a company needs a strategy, its leadership should start with customers’ needs and values. There are only six ways for strategic development:

1. To create new values to satisfy the current customers’ needs.

2. To find new, unsatisfied needs of the current customers and fulfill them with new values.

3. To find new customers for whom the current values will be valuable.

4. To find new customers, identify their needs and create new values for them.

5. To find new ways to monetize customers’ values (for instance, subscription instead of purchasing)

6. To combine all the above

All the “strategies”, such as “M&A strategy” or “diversification strategy”, are secondary to customers’ needs and values. For example, a company absorbs another company to offer its customers new values. It enters a new market to expand the business, but to do so it needs to find new customers and create new values for them. Sometimes a firm increases its market share to obtain some preferences (such as the scale effect in raw materials procurement), but these preferences should sooner or later be converted into customers’ value.

I believe that the only thing such terms as “cost leadership”, “product differentiation”, “fast follower strategy”, “price skimming strategy”, etc., can do is to distract us, astray us from the main point — a business earns money by satisfying customers’ needs.

Would you like to improve your strategic thinking skills? Take a look at my free online course on YouTube.