#88 B-to-B Competitive Advantage: Are Increased Margins The Ultimate Goal

(This is post number 3 of a series I’m doing on business strategy. My focus is the work of strategy guru Michael Porter via a book he cooperated on titled - Understanding Michael Porter: The Essential Guide to Competition and Strategy - by author Joan Magretta.)

In Michael Porter’s research on strategy he talks a lot about Competitive Advantage. And while he didn’t invent the term, it's almost always associated with his name. Unfortunately, folks tend to use the term in a way Porter would disagree with. Competitive advantage is NOT just something you’re good at that helps you beat your rivals. It is, as defined by Porter, about creating superior value. Meaning superior profit margins. (We discussed this last time.) And you must innovate to get to those dreamy margins.

Here’s a diagram that summarizes his thoughts...

931ba-right-mindset-1.png

In a nutshell, make more profit by innovating rather than imitating. 

That's a brilliant idea. But, using my favorite example of the cardboard box manufacturer, isn't there a limit to how many innovators a market can support. There are only so many variables you can tweak. The average Joe shipping a part from Buffalo to Indianapolis isn't going to pay a premium for your space age box. 

So, of course you can innovate. But you better be careful because innovation has a way of eating cash and time. And the payback is guaranteed to be somewhere between now and never. 

If innovation were easy or guaranteed everyone would be doing it. And if everyone did it, you wouldn't get a premium for it. 

Hmmm.

INNOVATE OR NOT

Academically and personally, I get Porter’s focus on innovation. I spent the bulk of my career in risky, venture capital funded tech startups. I enjoy buying innovative stuff on Kickstarter. I drive an electric car. 

Magnified Snowflake
Magnified Snowflake

But I’m just not sure his innovation advice is applicable to the small and medium sized business-to-business type companies I see here in the heartland.

Sure they innovate, but typically it’s incremental and it’s something their competitors can copy. So it's unlikely to lead to a long term profit margin premium. Not good in Porter’s eyes, but I’m not sure these business owners would care what he thinks of their work.

Yes, they'd love to be unique and special snowflakes that command a permanent premium. But, there's not an obvious path to that magical place. And besides, they're doing quite well as they exist today. Here are some examples…

Scenario #1: The owner is quite happy running at the industry standard profit margin. Yes, they’re on an efficiency treadmill fighting tooth and nail with their competitors on price and delivery. But they understand that treadmill a helluva lot better than risky innovation that might make them unique but might also blow up in their face. And, the industry standard profit margin of - let’s say 10% on their $5 million dollar business - nets them $500k per year. Plenty good to meet their needs. So screw the stress and extra hours involved in innovation - they’d rather head home and have dinner with the kids or grandkids.

Scenario #2: The owner thrives on the adrenaline of the top line of the business - buying companies, putting big sales number on the board. And they already make more money than they can spend. Not to mention that they’d get zero joy from the painstaking work involved in maybe adding an incremental half percentage point to the bottom line.

Scenario #3: The owner chooses to offer higher wages and benefits, which leads to less profit in their pocket. This could be for humanitarian reasons - the business is a channel for them to help others and improve the world. Or maybe they just want a life with fewer hassles. They figure the premium they pay lets them hire a more responsible employee that shows up everyday and does their job. They’re willing to pay for that peace of mind whether it leads to better profit margins or not.

Uncle Buck
Uncle Buck

Scenario #4: The owner is from the 2nd, 3rd, 4th… generation and doesn’t want to rock the boat with something new or risky. They don’t want to be the one that screws up the family business that great grandma started. Besides, if they do something that cuts the dividend checks in the near term, they’ll have to deal with Uncle Buck. The whining slacker that can’t hold a job but sure can make noise. And does the 2nd , 3rd, 4th generation owner really want to pour their sweat into all the overtime required to innovate when they only own 3.216% of the business? Hell, Uncle Buck’s sitting on his couch pounding out Cheers reruns and he’ll profit more from that sweat than the owner. They’d be better off negotiating themselves a bigger paycheck and not worrying so much about profit margins.

These are just a handful of scenarios where I see folks less worried about innovation and profit margins than you might expect. And they all make perfect sense. 

MAYBE PORTER ISN’T FOR EVERYONE

As I look at the research on competition and strategy done by Porter and others like him, I’ve noticed a couple things. 

First, it seems like almost all their examples are consumer-focused companies. I’m guessing there’s a reason for that. It’s easier to innovate when you’re trying to appeal to the whim of a unique consumer than it is when you have to meet a very detailed spec. Business-to-business seems like a tougher nut to crack when you’re trying to be unique.

And second, they tend to study huge companies. These firms can invest big dollars in efficiency and in R&D at the same time. They’re also battling for gains using other peoples money - the corporate treasury. But it's a whole different story for the small business owner. Where the energy and capital for the innovation comes from your personal time and your personal life savings.

So, again, I get innovation. I love it. I’ve lived it. But I’m not convinced that Porter’s advice has a lot to offer the small business owner when it comes to competitive advantage and strategy.

But I’m not giving up yet.

THE MAP

(This site is all about building a Map that will help me do work and life better. So at the end of each post I check in to see if any changes / insights come to mind.)

If this strategy stuff does lead to adjustments I assume they’ll be in the IF sections ofmy Self and Work Maps. But there’s nothing to report today.

See you next time…

***NOTE: I've added a new section to the website titled SPEAKING. Here you'll find brief examples of my public speaking, and information on how to get hold of me if you're looking for a speaker.