(This is post number 4 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.)
I’m a whiteboard person. I need a big open surface to get stuff out of my head and into words and pictures.
I also hate getting robbed, which means I refuse to pay the crazy prices they ask for a nice whiteboard.
Which led me to Ikea - the Swedish furniture maker. While they don’t sell a large whiteboard per se, folks on the internet raved about repurposing their Torsby glass tabletop. And the idea was a winner. I now have three Torsby’s hanging on my wall.
And, as a side benefit, the buying process gave me a dose of the IKEA experience. Which is convenient, because Porter considers them a textbook example of great strategy. Here's one of his slides that compares IKEA to a traditional furniture retailer.
IT'S ALL ABOUT YOUR ACTIVITIES
As we discussed in a prior post, Porter is all about achieving superior profit margins. And per this quote from Magretta (page 73 of Understanding Michael Porter), those profits come from…
“Ultimately, all cost or price differences between rivals arise from the hundreds of activities that companies perform as they compete.”
And the key word here is “activities”. She goes on to say…
“Activities are discrete economic functions or processes, such as managing a supply chain, operating a sales force, developing products, or delivering them to the customer. An activity is usually a mix of people, technology, fixed assets, sometimes working capital, and various types of information.”
And every single activity you perform you do either better, equal to, or worse than your competitors. So each activity increases or decreases your relative profits. Now it sounds here like Porter is suggesting you crank up your efficiency and get as lean as possible. You’d be kind of right, but there's more to it.
Let's take a look at the TWO ways Porter wants you to differentiate your activities.
SOURCE ONE OF ACTIVITY DIFFERENCES
You can be different by performing the exact same activities as your competitors, but doing them more efficiently.
He calls this operational effectiveness and competing to be the BEST. So you're all busting your asses to get more efficient - but, unfortunately, relative to each other you’re standing still. So while you must focus in this area to stay in the game, operational efficiency can't get you sustained premium profits. Which means, in Porter's eyes, it ain't strategy.
SOURCE TWO OF ACTIVITY DIFFERENCES
You can be different by performing a different set of activities than your competitors.
The key here is that your different activities must be hard to copy. They must have real consequences. They must be of the “either or” type. Here’s how Magretta explains these kinds of differences (page 122)…
“Trade-offs are the strategic equivalent of a fork in the road. If you take one path, you cannot simultaneously take the other.”
And Porter's favorite example of a company that makes these kinds of strategic tradeoffs is IKEA. (Take another look at the diagram above if you want more detail on the activities they string together to be unique.)
IKEA offers low-priced, in-house-designed, modular furniture that you select yourself, grab from the warehouse, throw in your minivan, and assemble at home.
Everyone else offers higher priced, assembled furniture, with zillions of patterns to choose from, and you select it with lots of help from salespeople, and then wait weeks or months until delivery.
Per these descriptions you can see that it would be really, really hard to straddle these models. The tradeoffs are huge in terms of personnel, square footage, logistics, design expertise, etc…
And that's why this is the perfect example of what Porter would call a strategy. And I get it. It’s pretty cool how it all comes together. But, as I mentioned last time, this stuff seems easier to pull off when you’re dealing with consumer products. The real question is - can it work in a business to business environment?
BUSINESS to BUSINESS WITH POWERSOFT
Recall in post #86 - Strategy Might Not Matter that I told you the Powersoft story. About how we were able to capture the graphical software development tools marketplace. From a strategic perspective, here are a few of our activities that combined to make us unique…
Most of our sales reps were developers or engineers. Which meant, unlike most tech company sales reps at that time, our folks could credibly handle first level demonstrations and technical objections. Which meant that, so long as we didn’t let ourselves get too bogged down in technical details, we were able to be super-efficient with our sales and technical resources.
Another unique aspect of our model was our channel leverage. Our unique compensation plans made it clear to our reps that the only way to knock it out of the park was to work hand in hand with our partners - and that's what we all did.
Both of these activities were copyable by competitors, but the tradeoffs would have been painful. Traditional reps were non-technical transaction-oriented folks. They didn’t get our evangelical / educational type of selling. And most high dollar direct sales reps also weren’t used to working directly with the channel. We, in fact, were so odd at the time that we found it hard to hire traditional reps. So we mostly grew our own. Here’s an excerpt from an old resume of mine that explains what we did…
“primary objective was to hire and train 40 sales, sales management and technical personnel and integrate them into a multi-channel sales model. The average sales experience of the incoming sales representatives was less than 6 months and the average sales management experience of the managers was zero months.”
And all of this was happening while the region was also doubling in size to $50 million in revenue and surpassing profit goals. So for someone that wasn't of the tech rep mindset in the first place, it would have been nearly impossible to copy us at that speed.
So Powersoft proves that these strategic “either or” tradeoffs can happen in B to B.
But, I’m still not sure they apply in light manufacturing and distribution type B-to-B businesses. The kinds of places that dominate the local economies here in small town Ohio. Where there always seems to be a demanding specification you have to meet. And where your competitors products are often so similar to yours that they’re hard to tell apart.
But, once again, I still refuse to give up on Porter. I still believe he’s going to provide us some value. Actually, I know he is because I've already outlined my next post. But you’ll have to come back next time to see what I’m talking about.
(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 of my 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.