If you read a business strategy book recently, chances are that it extolled the virtues of hero companies such as Apple, Amazon or Netflix. If you did so less recently, you may have come across former heroes such as Blackberry, Benetton or Kodak.
While the cast changes over time, the underlying logic is a constant. Business strategy book authors usually look at companies that were successful for a period of time, and then generate a supposedly generalisable set of rules that these carefully selected hero companies supposedly applied.
The message is that other companies would be equally successful, if they just were to apply those same rules. For example, one such rule we have come across is to "compete on differentiators other than price, such as brand."
Unfortunately, following strategy fads and copying the heroes’ alleged rules is dangerous. For one thing, fads suffer from adverse selection: they select successful companies while ignoring those that failed, including those that seem to have applied the same rules.
Second, every company’s customer and competitive situation is different. As a result, faddish rules are not generalisable and often not even applicable. For example, the rule that "companies should create a strong brand" may be sensible in certain situations, but in a commodity business such as chemical intermediates, brand building is most likely a value destructor.
The claimed sources of success of today’s hero companies (e.g., Apple’s focus on the visual beauty of their products) tend to be of remarkable irrelevance to the daily practice of managers in mainstream companies in the business of bulk cement, packaging solutions, payroll processing, funeral services, and the like.
It is not to say that faddish business books cannot be a source of inspiration and a stimulant to aspiration, but managers’ inspiration and aspiration alone do not determine a company’s success.
Ultimately it is customer choices that determine whether a strategy will generate the hoped-for financial results. As well-informed customers today have more choices than ever, a company’s financial targets must be the outcome of a better understanding of customer choices and how the company can affect those.
Therefore, rather than following simple rules, managers should remind themselves of the following first principles when formulating business strategy:
Customer demand drives revenues. Revenues are linked to customer demand for a particular product at different price points. For example, statements such as "Given the superiority of our product, we assume we will take 20 per cent of the market" may be fine to create excitement during a strategy offsite but eventually give a delusive perception of what is really attainable.
The potential market is smaller than the total market. Some customers may appear to be prime targets for a new product but they would never consider buying it in the foreseeable future, even if it were free and better than what they have today. For example, a customer may not be interested in switching to a new supplier because it just signed a longer-term contract with its current supplier or switching is just not on the agenda of the CEO at this moment. The number of "uninterested customers" may run between 50 and 80 per cent of the total market.
The accessible market is smaller than the potential market. Customers in the potential market are, by definition, considering switching suppliers but if your company does not satisfy all their minimum requirements, you are out. In B2B markets, for example, having a number of reference clients is often a minimum requirement. The accessible market may be significantly less than 50 per cent of the potential market.
A customer goes for the best deal. When faced with various alternatives, customers in the accessible market will pick the alternative that gives them the best deal, that is, the alternative with the largest difference between their willingness to pay and the price they have to pay for it.
A customer’s preferences need to be extracted. To affect what constitutes a best deal, companies need to understand customer preferences and the differences therein, not some sort of "average customer value". A solid method to elicit preferences needs to recognise that customers often can’t express their preferences directly. It should thus help customers in crafting and discovering their preferences in an unbiased manner. Such methods have successfully been applied in numerous product and service settings.
The bottom-line is that a structured and quantitative understanding of customer preferences, rather than business book fads, ultimately determines the success of your strategy.
Daniel Deneffe is Managing Director of Deneffe Consulting and serves as a professor at Hult International Business School and at Harvard University. Herman Vantrappen is Managing Director of Akordeon, a strategic advisory firm. They are the authors of Fad-Free Strategy: Rigorous Methods to Help Executives Make Strategic Choices Confidently (to be published by Routledge, September 2019).
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