THE STORY
Sometimes when my wife and I are on a road trip together, I’ll have fun by telling her that I want to race her to the destination. Of course, that’s a silly suggestion, because we’re both in the same car. As a result, we will both get to the destination at the same time.
I think that the very silliness of the suggestion is hilarious. My wife thinks the very silliness of the
suggestion is quite stupid. So I laugh
and she frowns. But every once in
awhile, I still bring up the suggestion when on a road trip.
THE ANALOGY
If everyone is in the same car, they will arrive at the
destination at the same time. It kind of
takes the fun out of being in the race, because there is no way to get a lead
over everyone else. It makes the whole
idea of racing kind of silly.
Yet, I see businesses doing this all the time. The company will set up all kinds of goals to
win and to exceed the performance of everyone else in their industry. The goals are quite impressive.
But when you ask them how they are going to win and achieve
those goals, the game plan is to operate by the traditional rules of their industry. My response is, “How do you plan on beating
everyone else if you are doing the same exact conventional activities as
everyone else in the industry.”
To me, that makes as much sense as trying to win a road race
by piling all the drivers into the same car.
For if everyone in the industry is playing by the same conventional
rules of operation, you are in the same car—the car of conventionality. You
are running the race the same way, with the same tools, same business models,
the same processes, the same strategies.
How can you expect to pull away and win a decisive victory
under those circumstances? I don’t care
how impressive your goals are. You haven’t
shown me a way to pull ahead and win.
THE PRINCIPLE
The principle here deals with another one of my 23 laws of strategy,
the Law of Unconventionality. This law
states that: “You do not achieve unconventional profitability with conventional
business models.” In other words, you do
not meaningfully beat your competition if you are doing the same thing they
are. If you want unconventionally high
levels of profits, you have to do unconventional things. You have to get out of the same car of
conventionality that everyone else is in and get a car of your own—a car that
runs a better race.
Why
Conventionality Won’t Win the Race
The problem with conventional methods is that they provide little
room for differentiation. If everyone is
going after essentially the same customer in mostly the same way with basically
the same offering, all the competitors will look about the same to the consumer
base. There is no natural reason for a
customer to prefer one competitor over the other.
Without any meaningful natural differentiation, the only way
to get an edge is by “bribing” customers with lower prices or added freebies. Of course, the other competitors will follow,
causing a downward price and profit spiral.
That is why the profitability of industries tend to drop
over time and mature industries have returns which are about the same as the
industry cost of capital.
The Need to
Differentiate
If there is an outlier in an industry who is beating these
odds and making high levels of profits, I’ll bet you it is because they are not
following the conventional rules of the industry. They are doing something very different—playing
by different rules.
Southwest Airlines has superior profits over conventional
airlines because it doesn’t play by conventional airline rules. It runs a point to point system with
different rules on seating, ticketing (won’t use other ticketing sites online),
baggage, fuel purchasing, employee relations and host of different things. By playing by different rules, it has a lower
cost structure and an offering which is superior to a significant sector of the
population.
Geico made a splash in the insurance industry by running
against the conventional approach of selling insurance personally through a
huge network of insurance agents. Instead,
they put the money into advertising and call centers and cut out the agent fee,
putting that money into other benefits.
Ashley Furniture gets higher than average returns for
furniture retailers by direct sourcing much of its furniture from low cost
countries and bypassing the branded furniture manufacturers which the
conventional furniture retailers use.
Amancio Ortega became the third richest person in the world
by re-writing the rules of the fashion industry. Instead of running the business around a
handful of fashion seasons each year, he built a system based on continuous
replenishment. This system supports his
Zara stores in a new way, called “fast fashion,” which is very profitable,
because it is a much more productive use of capital and inventory than the
conventional fashion operators.
Apple became one of the highest valued companies by avoiding
the conventional approach of specializing in either hardware, software or
distribution and build an integrated, closed system. It also changed the rules by focusing on
elegance rather than just functionality.
Differentiation
Breaks the Bribery Trap
When you do things differently, you give yourself a natural
edge. Either you create cost savings the
competition cannot copy so that you can profitably underprice them, or you
create superior preference so that customers are willing to pay more for your
offering. Either way, you get to zoom
past the conventional operators in the race to profits.
Apple has had long lines of people waiting to full price for
their integrated offerings, because many consumers thought their different approach
made it worth the effort to get one.
Because Zara sells through its offerings so quickly and
replaces them with something different, people learn that it is useless to wait
for items to go on sale. You have to buy
it at full price right away. And because
of their different cost structure, Zara’s full price is still a good deal
relative to conventional operators.
The Limitations of
Bechmarking
This is why benchmarking is only of limited value. It helps you to understand how others do
things, but it doesn’t tell you how to do things differently from everyone
else.
If you are falling behind in the race, benchmarking can help
you find a way to get into the car of conventionality. At least then you are no worse than average
and can ride with the rest of the conventional operators.
Or, if you see someone breaking away from the pack,
benchmarking can help you figure out how to get inside their car. For example, others like H&M and Forever
21 have copied much of Zara’s business model, which is starting to make that
the “new conventional” model.
But benchmarking won’t tell you how to become the next
Southwest, Geico, Apple or Zara.
Sources of
Differentiation
There are lots of ways to become unconventional. It can be done by going after a different
customer base, offering a different bundle of benefits, offering a radically
different way to solve an old problem, changing how a solution is delivered,
changing how an offering is paid for, and so on. There is not enough room in this blog for all
the creative ways to break the mold.
Look for your creative way and you’ll be pleased with the results.
SUMMARY
If you run your business the same way as everyone else in
the industry, you will never break away from the pack. You will be stuck in a world lacking
differentiation—and the added profits which come from differentiation. Only unconventional approaches lead to
unconventional returns.
FINAL THOUGHTS
A popular old circus act was to have dozens and dozens of
clowns pile out of a tiny car. If you
stick to doing things the conventional way, you are like one of those clowns stuffed
into the car of conventionality. And
those clowns get laughed at. Do you want
to be laughed at? If not, get a car of
your own.
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