Prof. Jan Bosch, 19 May 2020
This week, I had a wonderful conversation with the CEO of a midsized company (around 1,000 employees) to discuss business strategy and the implications on technology strategy in the overall context of digitalization. As the company supports its customers with digital solutions, it’s an example of the part of the economy that’s doing really well under the current circumstances. It’s a good reminder of the fact that it’s not so much that the economy is cratering, but rather that there are quite fundamental and accelerated shifts towards digitalization taking place in it. It’s just that news outlets prefer to talk about bad news (companies going out of business) instead of good news (the business of some companies is booming) because bad news sells more ads (if it bleeds, it leads).
The discussion with this CEO focused on the positioning of the company. It has much smaller competitors, as well as those that are (much) bigger and the question becomes how to differentiate your organization from these competitors. The simple answer is to do what they do but better or cheaper. However, as Einstein so eloquently said, for every problem, there’s an answer that’s simple, elegant and wrong.
The slightly less simplistic answer is to focus on one of the corners of the competitive triangle (customer intimacy, technology leadership or operational excellence) and organize your company based on that. Again, this perspective isn’t necessarily wrong, but it fails to give guidance as the question then becomes when to use what strategy.
'Commodity, differentiating and innovative functionality each require a different strategy'
In an earlier post, I introduced the three-layer product model where the functionality in a product, a platform or a product portfolio is organized into a layer of commodity functionality, a layer of differentiating functionality and a layer of innovative and experimental functionality. In our discussion, I realized that each of these layers requires a different strategy.
For commodity functionality, the focus should be on operational excellence as you’re looking to reduce the total cost of ownership for that layer to the minimum possible. This demands that you limit the alternative systems to deliver this functionality to the lowest possible number, preferably one. I still meet companies that have multiple solutions for the same commodity functionality and that can’t find the prioritization to reduce the number of alternatives and consequently continue to have outsized associated costs. In general, the goal should be to centralize, standardize and prepare for outsourcing the delivery of commodity functionality.
The differentiating functionality needs an alternative strategy: customer intimacy. This functionality is the key reason customers pick us over competitors and consequently, we need to work closely with customers to maximize the value we deliver to them. Here, the introduction of variants may well be justified as long as we’re able to monetize our efforts. At some point, what’s differentiating now will start to commoditize and then the rules of the game change to what we described above.
Finally, for the innovation and experimentation layer, the key strategy should be technology and product leadership. This is where we explore new innovations, which often are technology driven and which hopefully form our future differentiation. The success metric here is the number of things we can try out against our, often limited, budget. And if I say “try out,” I mean of course to evaluate ideas with customers. It’s too easy to get hung up in our own set of beliefs. Instead, work with customers and observe. Customers will never ask you for an innovation (and if they do, you’re in bigger trouble than you think) but will use what’s valuable to them.
Back to the discussion with the CEO: we concluded that it’s easy to look at our competitors, typically the larger ones, and consider copying what they’re doing, which typically focuses on standardizing and preparing for scaling. Or, to look at smaller competitors and focus on agility and customer intimacy. Although it’s perfectly alright to be inspired by what others are doing and to “steal with pride,” as leaders it remains your key responsibility to define a business strategy that’s uniquely different from the others in the industry. Being like everyone else lands you in a red ocean where cost and slim margins are the only things you can think about. Instead, be different in a way that matters to customers, find your blue ocean and build a great business. And, to quote Steve Jobs, if you haven’t found it yet, keep looking!