If Abe Lincoln had been a marketing manager today, well, the US would be a whole lot worse off. But if he were, he might say “You can please some of your customers all of the time, and all of your customers some of the time, but if you try to please all of your customers all of the time, you will please no one.” What is a company to make of that?
If you try to follow the changing whims of anyone who will buy from you, you are headed into dangerous, and expensive, territories.
If your customers have a choice in who they buy from, you are competing for their attention by differentiating from your competitors. But “customers” is not a monolithic bloc. Those who buy from you have a number of different motivators which are likely changing all the time. If you try to follow the changing whims of anyone who will buy from you, you are headed into dangerous, and expensive, territories.
There are a ton of differentiation strategies out there. The one I like the best is Treacy and Wiersema’s The Discipline of Market Leaders (Treacy & Wiersema, 2007). The reason I like it is that it simplifies the complexity of markets down to something understandable, something that the customer is seeking, while still providing a guide to creating value for the customers you choose to have.
Now, let’s bear in mind George Box’s aphorism that, “all models are wrong, but some are useful.” I don’t know if their model is the ultimate description of the buyers’ brains, but I will tell you that over many years it leads to a lot of “aha!” moments at my clients, with subsequent clarification on what they should be working towards (and what they should not). So it seems useful to me at least.
...customers are primarily seeking the best provider of one of three things when they are deciding if they will buy your product or service.
Treacy and Wiersema propose that customers are primarily seeking the best provider of one of three things when they are deciding if they will buy your product or service. These are:
- Operational Excellence – the lowest total cost through the lifetime of the product
- Product Leadership – the new product that you can only get from one company
- Best Total Solution – the customized solution for their individual needs
Imagine a customer who is looking for a hamburger. How do these different categories affect my business?
A customer looking for the lowest total cost hamburger is seeking low cost in time and money. The company that can provide that the best will be the most attractive and likely get their business. Now if I want to create an operational excellence business, I am probably looking at standardizing my operations and innovating how I can reduce cost everywhere in the process. I am going to hire people who like to look for ways of making hamburgers faster and cheaper and driving out waste. I probably don’t give my front-line workers a lot of choices in how they do things, so I reward them for following the rules. I am going to buy equipment that is reliable. I make a profit by relentlessly reducing costs so that I can continue to offer the lowest price in the market.
A customer looking for the product leader in hamburgers is looking for the next big thing and is willing to pay a little more for it. My product leadership business will invest in creating new and different hamburgers that no one ever asked for, but that my customers want once they see it – vegan bacon lobster hamburgers here we come! I hire people who like trying new things out, and who enjoy constantly adjusting their processes to accommodate these new things. We have management that responds quickly to new trends and communicates that across all of our locations. We only standardize where we must. My front-line employees are the source of many new ideas, so I train them to be “intrapreneurs.” I make a profit by charging a premium for that hamburger that no one else makes, and that my customer absolutely must have.
Finally, a customer looking for a best total solution experience is looking for customization when they order a hamburger. My business is going to be designed to get very close to the customer, so that I know what they are going to want, sometimes even before they do. Maybe we greet you by name and start your usual order right as you walk into the restaurant. I am going to innovate in creating processes that can handle whatever unique combination of features my customers need. I need to place a lot of trust (and training) in my front-line. They are the way that my business fulfills that custom experience and they need to be empowered to do so. We will need to be willing to suffer a short-term loss in order to earn a lifetime customer. Our product is crafted to the requirements of the customer, and they can’t get that experience anywhere else. I make my profit by charging a high premium for that experience.
...a company needs to strive to be the best in only one of those three areas, but it can’t ignore the other two.
Key to Treacy and Wiersema’s model is that a company needs to strive to be the best in only one of those three areas, but it can’t ignore the other two. It needs to maintain “parity” with other companies in those areas.
So the Operational Excellent hamburger joint can’t just say that there is no customization. The Product Leadership restaurant can’t just ignore process efficiency. And the Best Total Hamburger Experience can’t charge unreasonable amounts for their food.
I have always imagined this on a three-axis plot. Hey, I am an engineer, you can’t blame me!
Here are the three axes:
If we mark the location of a business that excels at Operational Excellence and meets the parity requirements in the other two areas, it would look like this:
The blue area could be thought of as the resources the business is devoting to the three different ways to differentiate. This company is excelling in Operational Excellence but maintaining parity in Product Leadership and Best Total Solution.
Doing business is hard, and the pressure to sell something, anything, is immense. There is pressure to go after customers that are not aligned with our area of expertise and differentiation. This assumes that all revenue is good revenue.
There are a couple of problems with this, however.
Remember those different businesses we built for hamburgers? The processes, intention, innovation, even the types of employees we wanted were completely different. If my Operational Excellence hamburger joint wants to start appealing to customers focused on Product Leadership, we are going to have to start allocating resources to developing new hamburgers. But I don’t have infinite resources so that probably means re-allocating them from other areas. If I then see the opportunity to get more business by improving the customers’ experience as a Best Total Solution, I have to re-allocate more resources to that. In the end, in the pursuit of more customers, my allocation might end up looking like this:
The problem ... is that by going after these new customers, I have become less attractive to the ones I already had...
The problem here is that by going after these new customers, I have become less attractive to the ones I already had by losing my market leadership in Operational Excellence. At the same time, I am trying to appeal to the Product Leadership and Best Total Solution market segments, but I am not the leader in that either, so those customers seeking that prefer my competitors that are.
On top of all of that, I have had to build product leadership and customer experience infrastructures in parallel to the operational excellence ones I had, so now everything costs more. And I have the wrong type of employees I have taught to have the wrong mindset and have given the wrong training as well.
The sad irony is that I thought I had to do that to gain more market segments and make more money, but I end up losing to my competitors in all three models of differentiation. Trying to be everything to everyone means that I am no one’s first choice.
...know your business, know your customers, and have the ability and strength, to say, “No”...
And that is the “discipline” in the title “The Discipline of Market Leaders.” It is the discipline to know your business, know your customers, and have the ability and strength, to say, “No” when tempted to pursue customers that are outside of your business differentiation model. The irony is that you really can’t afford to take their money because, if you do, you will be spending more money to lose your other customers.
In the end, good old “Marketing” Abe turned out to be right. Companies need the discipline to choose and excel in one aspect of what potential customers are looking for – one of the three models above – while maintaining parity in the others. Sadly, in most companies, Abe is rewarded for increasing revenue, not profit, and so has the incentive to ignore all of this and grab any customer he can get in the door. Abe gets to buy himself another new boat, while the business is left trying to figure out how they are making less profit while bringing in more revenue.