What do we need to be good at, and why?

Competitive advantage for SMEs, Part One.Spudgun goes for the 'epic' look

Strategy begins and ends with the customer. 

Well okay, the purpose of any business, to paraphrase Peter Drucker, is to create a customer. The point of strategy though is that it begins and ends with your customer. Just chasing custom is the single biggest mistake a business can make (other than running out of cash). Competitive advantage comes from knowing who your real customers are, understanding what your customers and potential customers want (whether they know it or not), and making sure that your business can deliver on those things better than anyone else. And that you’re not wasting your time doing things that don’t matter to your customers. How? By making sure that you are doing something unique, something important enough to enough people to make it worthwhile, and which above all means finding something which your competitors can’t do without compromising their own strategy. Above all, you have to be completely clear on what you’re not going to do.

The first point – doing something unique and valued – is the essence of entrepreneurship. That one’s down to you. The second, foreclosing on your competitors, even the huge ones, is not as impossible as it sounds. We’ll get to that in due course. The third, deciding what not to do, sounds easy, and is anything but.

A good starting point is knowing exactly who your customers and potential customers actually are.

This isn’t as daft a point as you’re thinking. There are plenty of distribution businesses, online and offline, who think that consumers are their customers when it’s their ‘suppliers’ who pay their commission. There are businesses who think that their customers are the consumers who buy their products, rather than the channels that sell them, and who can’t understand why they are bombing in the ‘B2C’ online world. There are premium service businesses who discount heavily in hard times, and find that their new customers are aliens, so demanding and disruptive they wish they’d never bothered. There are value-for-money businesses that rub their hands at the prospect of ‘moving up the value chain’ and capturing some of that lucrative high-margin clientèle, who miss the catastrophic adverse effect of the extra complexity added to their business models. And there are other businesses who seemingly effortlessly negotiate all these pitfalls, because they know, really know, what they are. And more importantly, they know what they are not.

For an established business, the starting point is understanding what is important to your existing customers. Most businessmen have an intuitive sense of this. “My customers appreciate convenience”. “My customers don’t give a stuff about anything but price”. And so on.

This high-level intuition, if that’s the right phrase, isn’t necessarily wrong and many businesses get by with little additional insight. But there are two problems with it. Firstly, your view of what you are providing is too general. Most people care about price, and convenience, whether they get it from you or from someone else (or for something else for that matter). Secondly, if you have, say, 2,000 existing customers, you have 2,000 individual answers to the question ‘what is important to you about our product?’ And those answers will change by tomorrow.

So you have to find out what is really important to each of your customers, which is much more likely to be a basket of different things than a single factor like ‘price’, and you have to have a way of grouping your customers to create manageable ‘segments’ without losing important distinctions between them. Oh, and you have to find out exactly why those non-customers who should buy your product don’t. And segment them in the same way. While you’re at it, find out who you’ve managed to piss off so far. And why.

None of this is nearly as easy to get right as getting it wrong. Your intuition can be too general. Market research can end up sampling only those customers who enjoy participating, for whatever reason. Volunteer focus groups can give too much weight to your existing fans. In the end, the best approach is to collate and cross-compare as many different sources as possible, including the views of your own people (gathered in a process likely to elicit honest opinion, rather than the sycophancy to which you’ve become accustomed), your suppliers, TwitFace.com (yes – I don’t care if social media is the work of the Devil – you’ll regret it if you don’t), agents, double-agents, Americans. And there is nothing wrong with putting on a false beard and milling around wherever your customers hang out. It’s easier online though. 

The real difficulty is seeing where you need to draw meaningful distinctions. It’s not uncommon, for example, for first-time customers to have completely different priorities to loyal users. Families from couples. Schoolteachers from accountants. This is endless.

So you’re not going to get this right. No one ever does. Including Tesco. But you can get close enough to draw meaningful, strategic conclusions.

But what about financial objectives – making a profit and all that stuff. Well yeah, okay, but financial results are an outcome, not a useful objective in themselves. In other words, getting strategy right will necessarily lead to an optimal financial outcome, but conjuring up a financial objective, say ‘making a net profit margin of 10%’, or ‘achieving an annual growth rate of 15%’ is useless, for two reasons:

Firstly, it tells you nothing about what you have to do. Customer objectives will translate fairly cleanly into operational plans. And hitting a customer objective will usually have a specific and measurable financial consequence. But the financial consequence is an outcome, and…

Secondly, it’s useless to set financial objectives which have no grounding in strategic reality. Let’s say you think that lack of growth is an issue for you. It may be that the conditions in your market mean that you can carve out a loyal customer base with a unique product that no-one else can match, but which won’t deliver growth. Great margins. Brilliant cash flows. But no growth. You may want growth; I want to teleport at will. Neither is going to happen. But by pushing for a financial goal which is inconsistent with your basic strategic positioning you may screw the business you’ve got. You drop your prices and invest like crazy in promotions and Google ad-spend, but you don’t get the growth you were looking for and now you’ve educated your customers to expect lower prices, and you’ve become as dependent on the 800 pound Googlerilla as any crack-addict. You want growth? You need a new product and probably a new business model. 

None of this is meant to deny the value of holding your own feet to the fire with targets if that’s what you need for motivation and discipline. Just don’t mistake them for strategy and make sure, like absolutely everything else in your business, that they are consistent with the reality of your strategic position. Hitting financial targets should be a test of the validity and success of your strategy. If your strategy is working and you’re missing your targets, you’ve got the wrong targets, not (necessarily) the wrong strategy.

Now then, where was I? Oh yes, customers. What we’re aiming to do is build a picture of what we need to be good at. At this point we’re not too concerned if some of our customer segments have conflicting needs, although we’ll have to tackle that in due course. Equally, at this stage we’re largely ignoring what our competitors are doing, although we have at the back of our minds that we should be doing something unique and difficult to copy.

Some features you’re going to have to excel at, others you’ll have to be ‘good enough’ at, yet others you’ll ignore altogether. Remember, you’re not trying to be all things to all people. You have to decide which customer segments you’re not trying to win over.

It’s worth dwelling on this point. If you’ve decided that you can structure your business to have the lowest cost base in your sector, and you’ve decided to convert this advantage into having the lowest prices in your sector, then you’re probably not going to match the other guys on all aspects of product quality. Some you’ll be able to ignore, some will need to be at a ‘good enough’ level. Similarly, if you have a marginal quality lead across a range of features, you may decide on a policy of ‘price parity’ with your competitors, rather than undercutting them. Put another way, there are going to be some things that you can do that give you a real competitive advantage, and other things that you can do that stop you from suffering a competitive disadvantage. And they’re not quite the same thing.

If we’re a start-up, or introducing a new product category, then it’s either more or less straightforward depending on your point of view. Henry Ford apocryphally said that if he’d done market research before going live with the Model T he’d have ended up making faster horses. Steve Jobs became (eventually) one of the most successful innovator-businessmen in history by following his own demanding instincts and ignoring naysayers. And it’s true of course – consumers aren’t necessarily going to be great at evaluating something outside of their experience. And they certainly aren’t there to propose new ideas in the first place – that’s your job. But the thinking is still the same – what unique package of features does this bring to the marketplace, and will enough people love it to make it viable? And, Steve Jobs aside, it’s still best to at least bounce this stuff off potential customers instead of trusting your own megalomaniac judgement. For every ‘iPad’ there’s a thousand ‘Pintos’ out there.

Whatever. What you’ll end up with is a list (or a series of lists) of customer objectives, which might look like product characteristics, service features or, more likely, a combination of the two. If you want to chat to expensive people about this then you can talk about ‘value drivers’ or ‘key factors for success’ instead. Same thing. You’re on your way to becoming a strategist. Knock yourself out.

At this stage you don’t need any fancy charts. You might have a simple list of stuff you need to be great at, and stuff you need to be good enough at. Or you might have a series of lists, one for each customer segment you’ve identified. This is enough to get you started in answering the next question, ‘what are we actually good at, and does it matter?’ (which we’ll get to in the next article in this series). But it’s not sufficient because it largely ignores the most important factor in competitive strategy – your competitors. We’ll get to that too.

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