The E-Marketplace Investment: Avoiding a $15 Million Mistake
How High Tech Firms Find Replacement Technology
Avoiding the New Economy Backlash
One-to-One Pricing in the New Economy
The Erosion of Comparative Advantage (Part I)
The Erosion of Comparative Advantage (Part II)
Linking Strategy to What Customers Value
Organizing Corporate Development Activities of Acquisitions and Ventures
Growing and Winning
Have you been spending too much of the last few years rationalizing or re-engineering — cutting expenses, inventory and people?
Now that you’re leaner, we think it’s time to turn your focus on winning and growing once again. Competitive strategy rooted in the economics of your business can be the blueprint for that sustained growth.
In every business, a few leverageable economic relationships — the key sources of comparative advantage — give one company competitive superiority. In many businesses, these drivers, like economies of scale, the experience curve, or run length economics, relate increased throughput to lower unit cost. More volume makes your business immediately more profitable.
Using low costs to grow. Higher profits creates the steerage to pursue faster growth by pressing the cost advantage further — driving down an experience curve, for example– or leveraging other downstream sources of comparative advantage. Both can create even higher potential profits.
You need to figure out how to leverage lower costs to grow even faster, gain share and thwart competitive assaults. Growing this way, rather than through raw price cutting, can have great long term benefits. In financial services, for example, Fidelity’s investment and volume have always given the company lower costs for transactions, for statements and reporting, and for marketing than most companies. (Figure 1 is our estimate of the relationship between volume and cost to serve).
Fidelity uses its low costs to continue to invest in its business, increasing the value of customer service. The company mails customers and potential customers more frequently and with higher quality information and advice. Statements are easier to read, reporting is timely, marketing brochures get out faster. Fidelity pumps out an increasing variety of investment and service alternatives. The company sells more to existing customers and attracts new customers, while the bar for competitors continues to be raised and…Fidelity’s costs keep coming down (Figure 2).
The performance of Fidelity’s funds helps, too. But make no mistake. Fund performance is not the core reason for success. According to Morningstar, lots of funds outperform Fidelity’s.
Another example: In the building controls business, several companies sell a lot of a few basic designs, leveraging design costs over volume in the larger segments. One company sells multiple systems, which use similar components.
The broad choice appeals to architects and building engineers. Design costs are higher, but are leveraged over many different segments, so total cost per unit is much lower than any competitor. The company uses its lower cost to grow and choke competitors by providing superior system performance, better customer handholding and products which appeal to finer and finer segments (Figure 3).
Beyond lower costs…leveraging customer values. In many businesses we’ve worked in, some very subtle relationships (having little to do with costs) lead to profitable sales growth. These come from a thorough understanding of what customers value and how customers buy. If you can uncover these key sources of comparative advantage in your business, you can build a competitive strategy to grow and win.
For example, a mall-based retailer we worked with, after an unprofitable geographic roll out, discovered the power of store clustering. The company began to back fill in denser population centers and withdraw from thinner area to improve supervision and distribution. In the process, instead of expected cannibalization, sales per store increased. The retailer built recognition. Customers began to expect to find the company at the mall.
Although mall based stores advertise very little (with high rents they need to live off of mall traffic), with clustering, more advertising became economical for this retailer, giving the company another burst of profitable growth.
In an industrial distribution business we know a key source of comparative advantage is the cost of serving an account leveraged by account density. However, one company discovered that sales were also related to density of account. In trading areas with high concentrations of customers, the company could economically locate zone inventories which yielded higher fill rates and immediate delivery. Customers valued suppliers that could fill complete orders. And with a high density of accounts, there was always a truck going in the right direction.
Another example: we worked with a database company that, rather than simply selling a plain database, married it to expert problem solving capability connected on-line directly to customers. The key source of comparative advantage was the relationship between sophisticated data use and sales. With this enriching the business concept customers were willing to pay more for the core database, and purchase more frequently. Both margin and sales grew.
Other clients have discovered that the real power in electronic commerce — seamless system ties to customers and suppliers — is not in reducing costs at all, but in improved fill rate, delivery time, or a broader and deeper product line. Telephone order takers in one growing consumer catalog we’ve worked with had complete visibility to supplier inventory and could offer products not in the catalog warehouse. Delivery to customers came right from the source.
If you wish to grow your business, you need to distill and articulate what critical factors bring success and understand how these can be used to grow in present markets or extended into new products, markets, or operations. When you know how customer values and the cost of doing business interact, you can uncover strategies that optimize profits and growth.
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Easton Consultants. All rights reserved.
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