Monday, December 14, 2009

Three Types of Market Leadership

Reading the book "The Discipline of Market Leaders" by Michael Treacy and Fred Wiersema is very interesting... it defines the three ways to achieve market leadership: operational excellence, product leadership, or customer intimacy. Each goes after a different way of perceiving "value" by the customers.

Operational excellence

A market leader of operational excellence has a business that is run extremely efficiently, all in operation and execution of business functions. They often promise lowest prices and/or hassle-free service. They don't innovate, and they don't offer one-on-one customer service. What you get instead is a very smoothly run operation with low operating costs, which enables them to lower prices while consistently delivery quality in either products or service.

One example is PriceCostco. They stock less than 5000 items, compared to over 50000 items in a typical supermarket, but they are as large or LARGER than most supermarkets. You don't go there for the selection; they already selected the "best stuff" for you, and they say on on their newsletters / magazines. The lack of selection to them is an asset, not a liability. They buy in bulk of the best sellers to lower the prices, and pass on the savings to you. They move a LOT of merchandise, and the result shows.

Another example is Dell. They move a LOT of PCs by going direct sale. A typical PC is usually assembled within the hour of the order, and packaged for shipping within 24-48 hours. Dell also offered direct customer support through phone, next day air shipment of parts, even a live technician at your location if you need it, instead of thorugh local vendors. They did not invent the PC, but they invented a new way to do PC business. They did not add too many innovations, but they do have a great operation.

On the service front, an example would be Southwest Airlines. By specializing in short-haul business markets, standardizing on a single smaller plane type (instead of who's offering the cheapest plane of the month), and flying out of cheaper airports (OAK instead of SFO, for example), and cutting stuff like meals, magazines, baggage handling, and so on, they are able to offer more frequent departures and lower prices, both of which are important to business travellers. The lack of amenities is an asset, not a liability. The minimal service (just peanuts and soda per flight) means staff on each plane can be reduced, and planes travel lighter, less fuel spent. Only one plane type means maintainence is simplified. By specializing in mostly business markets with more flights, and only expand into airports with under-served potential, Southwest is able to offer more frequent departures (often, a flight every hour or so, more often than some local bus service!) and still maintain profitability.

What are common among these market leaders?

* Anti-variety -- variety invites inefficiency, esp. when it does not contribute to customer satisfaction, and may in fact add to customer confusion. A cookie is a cookie. People aren't going to eat more cookies just because you packaged them differently.
* Anticipate customer demand -- demand prediction and refinement must be accurate, or you can't maintain efficiency. How you react to moving demand is key to flexible operation. If Dell runs short on Part A, say, 15-inch monitors, they simply have a sale on 17-inch monitors until the imbalance is addressed.
* Refiner, not innovator -- operational leaders are never the first in the industry, but rather, they jump in after studying others and kill the inefficiencies. Dell didn't invent the PC. Southwest didn't invent business travel. However, they were able to NOT spend money on research and developement or extensive customer hand-holding in order to provide sufficient quality for the lowest prices.

Product leadership

A market leader of product leadership has products so new it defined the niche, and/or continue to push the boundaries of what is possible, or quality so high it redefined the existing niche. They are also constantly trying to outdo themselves.

One product niche definer is Johnson & Johnson. Their Vistakon division, maker of specialty contact lenses, heard about an invention in Copenhagen that revolutionizes the way disposable contact lenses can be made. They quickly acquired it, and thus the Accuvue disposable contacts were born. It took them a bit of initial marketing $$$ to define the niche, but once they did, they have virtual monopoly over the market for many years, and still holds the dominant position.

Another product niche definer is Intel. Intel created the first general purpose commercial microprocessor: the 4004. Later it was expanded into the 8008, then 8080, and finally, the processor selected for the IBM PC, the 8088 and its cousin, the 8086 (for the IBM PC XT). What you may not know is that Intel always works abut 2-3 generations ahead. When 486 was launched, the team is already getting the Pentium ready, and Pentium II was already on the design board. If you check Intel's website you'll see that they have "roadmaps" of future products available, and in fact spends $$$ telling everybody at their annual "Intel Developer's Conference".

An example of niche refiner is Apple's personal audio, i.e. iPod. Apple is certainly NOT the first company to get into personal audio. Diamond Rio series was the company and product that defined the era of the MP3 players, but Apple took the idea of a player, put the slickness and super-intuitive touch controls on it with a great screen, add the iTunes store and the software / play manager with it, and redefined the personal audio market. Ever since the iPod's launch, different versions, such as the Nano, the Mini, the Touch, the Classic, and multiple generations of each are constantly pushing the envelope of that a personal audio player is. There are other MP3 players out there... iRiver, Microsoft, Samsung, Sansa, Diamond Rio, Creative Zen... but none are as much a cultural icon as an iPod.

An example of a company doing both would be Sony. Sony invented the "Walkman", a portable tape player size of a paperback novel, that uses small batteries and headphones. As one product is being launched, other teams are already designing the next two or three generations of this product line. They defined the niche of personal audio, and eventually produced a Walkman that's not much larger than the cassette itself, and uses a SINGLE AA battery (the original uses three). As a result Sony virtually cornered the market for personal audio players (Walkman became almost a generic term) until MP3 players came along and changed the game.

What are common among these market leaders?

* Need to innovate -- huge amount of operating budget is spend on research and developement. In fact, up to half of the costs is often in R&D, esp. for Intel, by making things smaller, faster, more powerful, and more reliable. Without innovation, one cannot continue to stay in the lead. NVIDIA, ATI, and 3DFX used to be the 3 powerhouses in PC graphics. 3DFX died when it failed to innovate beyond Voodoo 3/4/5 (which are essentially the same product), and NVIDIA and ATI are constantly trying to outdo each other with a new product line every few months, each leapfrogging the other in terms of performance and price.

* Outdo oneself again and again -- to render one's own product obsolete, so the competitor never get a chance to establish a foothold except in price... competing against an older generation of products. iPods have gotten better each generation, with newer capabilities. Each generation of Japanese 50mm SLR cameras have gotten better and better, with more and more features. Auto-focus, digital back (converts regular SLR into digital SLR), motorized film feed, film dating, smart multi-zone autoexposure, face recognition, red-eye reduction, eye tracking... the list goes on and on. So much so, nobody else bothers making 50mm SLRs any more.

* niche re/definer -- Acer invented the "netbook" category by creating a subnotebook with a 9inch screen using the Atom processor from Intel that was really meant for Smartphones (running Windows mobile), but result is so cheap (under $300), and yet so profitable (up to 25% profit!), everybody is making one. Flip redefined the personal camcorder category by offering a memory camcorder that is compact, almost foolproof, records for hour or two, and uploads straight to the PC via a flip-out USB port, no cable or dock or tape or dubbing needed.

Customer Intimacy

A market leader of customer intimacy has such close relations with its customers it virtually becomes a part of their customer's team. It doesn't have the latest products, or the most efficient operation, but it provides the best customer experience and overall satisfaction. They anticipate customer problems, and helps customer cut costs and offer new services to customers that customer didn't even realize they need.

IBM is probably the best known example, at least back during the 70's and 80's. It used to be said that you can't go wrong recommending IBM. The reason is NOT that the IBM's products are latest and greatest, or cheapest, but that their sales team has enough engineers to help customize the system to really fit a customer's needs. By offering a broad range of products, none of which are actually a class leader, IBM can instead provide a full turn-key solution to solve a problem. The sales team will take the time to learn the business, learn the problem, then customize a system to SOLVE the problem. It's not just the sales team, but the infrastructure and corp culture that's in place to support such a team, that provides the customer intimacy. Other companies tries to do the same by hiring ex-IBM folks, but they didn't have the same corp culture and thus cannot duplicate the success.

Airborne (Express) is probably the latest example. They go after corporations with needs to send out large quantities of stuff to various branch offices, and vice versa. They offer BETTER solutions and more customized solutions than Fedex or UPS. They can't compete on price, so they don't even try. Instead, they offer better service and better integration with their customers that it's something Fedex and UPS simply cannot match. The account managers are practically "shipping consultants" to each client on call to solve any sort of shipping problem. Airborne offers "Sky Courier" for "next-flight-out" emergency orders, as well as "Advanced Logistics" for truck orders, both are affiliated but separate companies, to provide a full range of shipping solutions. In one instance, trying to cut Xerox costs for emergency orders that arrive after 5PM cutoff for next-day air, Airborne introduced the "chase truck", a truck that makes one last run from Xerox HQ at 6:30PM to pick up any last-minute orders, and go straight to the airport, instead of back to the hub for sorting. This cuts down on the Sky Courier use, which costs 10x more.

What are common among these market leaders?

* Not just care about the customers, but BE the customers -- dedicated account managers handling few (or just ONE) client, and being an expert in the field, that the client can rely on for advice on those issues. Some account managers actually have an office at the customer location. With advent of Internet and Computers, often virtual offices can be setup almost anywhere, allowing entry of orders or information almost anywhere. A shipping / logistics company can "receive" inventory for a company as soon as it gets on the truck. An accounts payable team can integrate with client's invoice team so transactions goes through in almost real-time instead of faxes and e-mails back and forth by entering stuff into each other's system linked via the Internet. And so on and so forth. By BEING the customers, the employee can appreciate what sort of challenges the customer faces... and propose solutions, sometimes even before the customer realizes there is a problem.

* Solution delivery, not just product sales -- customer satisfaction comes from having their problem solved, and their profits increased, and that would increase customer loyalty. Instead of just selling the customer a product, you are actually providing an invaluable service that will boost their productivity, not taking it away from them in terms of integration and customization. A small company may not have a fulltime training / support staff to roll out a new product, so by designing the new product to work almost the same way as the old one, but with additional options and other functions, you minimize training and support costs for your client while still achieving your sales, saving them money and increasing their satisfaction.

* Eliminate redundancy and leverage expertise -- The usual model of retail is that the factory hires trucks to ship to retailer's distrubution hub, then more trucks move stuff from hub to the stores. The factory may own trucks, or hire logistics firms. The retailer / distributor may have their own trucks. So there are two to three layers of duplicated work there. By eliminating redundancy and fully integrate the shipping, a logictics company can go straight from factory to the retail stores, eliminating the need for a distribution hub altogether. Faster shipping, more flexible orders, less inventory, lower operating costs, and more are the results by leveraging the shipping expertise of a shipping / logistics company. The retailer no longer needs to own a fleet of trucks and run them / maintain them, further decreasing costs. Similar leverage can be achieved in other industries as well, esp when it involves service.

A Bit of Mutual Exclusivity

Please keep in mind that it is not really possible to do all three. If you have the best operation, you don't really have the resources to hand-hold each and every customer that walks in the door, or the resources to develope the latest and greatest product. If you hand-hold every customer that walks in the door, you don't have the resources to provide the most efficient operation and/or to develope the latest and greatest. If you do want to develope the latest and greatest, you will be spending a lot of resources on R&D, which is not operations, and not customer hand-holding. Thus, the three approaches above are, in a sense, "choose-one". If you choose to do more than one, you'll end up mediocre in all three, and thus, be a nobody.

There was a bit of sales wisdom that goes, "Either be the most expensive, or be the cheapest. You don't want to be in the middle as nobody notices the middle." They are talking about the overlap between the product leadership and the efficient operation. The efficient operation can yield cheaper yet still high quality products, but they are nowhere near as technologically advanced as the products from the leaders. Any proper electronics maker can make MP3 players. Indeed, they are making them cheap enough to be almost disposable nowadays (actual cost is no more than $5). However, people still buy iPods and the expensive players... and the cheap ones. Different markets require different products.

In conclusion

You must choose the way your business will achieve market leadership. Study your business and your market, and pick one of the three methods above through which you will dominate the market. Choose carefully. Your corporate image depends on it.

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