Saturday, June 11, 2011

Getting There (or, When the Ends Don’t Justify the Means)

In “Types of Strategy: Which Fits Your Business?“ four strategies are discussed in detail: low-cost leadership, differentiation, customer relationship, and network effect. The two that I find most interesting are customer relationship and low cost leadership. What interests me is that although both strategies can lead to big profits, the paths they take to make that money are very different.

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A cost leadership strategy might make you rich, but would any of you really be proud to own or work for a company like Wal-Mart, which is used as an example pretty much any time cost leadership comes up? In class it was mentioned that they started out as a mom-and-pop store. Now they’re known for running mom-and-pop stores out of business, sticking it to their employees, and getting products in less-than-ethical ways. Sticking it to the employees is a by-product of adopting this strategy. If you want to reduce costs, just pay employees less, hire fewer full time workers, don’t give them benefits, etc. If it’s all about turning out a less expensive product and some kids in China will make something a little cheaper, well, it might be tempting to look the other way (as Wal-Mart is notorious for doing). I lived in Tulsa, Oklahoma for a while and although almost everyone shopped at the Wal-Mart grocery store because it was convenient and cheap, no one really liked the company and most would have been happy to see it go out of business (even though, paradoxically, that would have led to more expensive groceries).

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Contrast that with companies that adopt a Customer Relationship Strategy. I’ve used USAA, which was discussed in the article, for a long time and even though I hate dealing with money, I can honestly say it’s the best company I’ve ever worked with. As far as companies go, from what I’ve experienced it’s just about perfect. SAS is another good example of a company that uses this strategy. They go out of their way to take care of both their customers and employees. The article also mentioned that many mom-and-pop stores use this strategy. What in the world do USAA and SAS have in common with small mom-and-pop stores?

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They’re all just nice. I’m sure most analysts would say it’s silly to talk about “nice” companies, but what do analysts know? Nice companies might be hard to define, but you know them when you see them, especially if you stack two companies side by side. A small mom-and-pop store versus Wal-Mart – one is nice, the other nasty. USAA versus any other bank – one will help you out while the other will pull every trick in the book to screw you over. SAS versus most low cost leadership companies – one takes care of its employees and the others skimp on everything to make a cheaper product.

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Look beyond the next quarterly earnings report into the (hopefully) distant future when you’re lying on your deathbed. You’ve built a huge company with thousands of stores scattered all over the world. Maybe you didn’t take care of your employees, maybe you used a little child labor, maybe you took advantage of a few questionable business practices, maybe you pulled a few tricks that helped you run the competition into the ground; but you made money. Oh yeah, and you created some kind of inventory system that was noted in a couple HBS articles.

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It’s interesting that in business and management articles people and companies that do those sorts of things (i.e. Wal-Mart) are admired, while in the real world regular people see them for what they are (jerks) and look forward to the day when they collapse.

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Pursuing a low-cost leadership strategy aggressively will turn you into a jerk. No company that pursues this strategy can take care of its employees like they do at SAS. No company that pursues this strategy can take care of its customers like they do at USAA. You can’t pursue this strategy half-heartedly. If you give your employees good benefits, the other guy won’t, and then you’re not the cost leader anymore. Maybe you can do the right thing at first, but as competitors start catching up, you’re going to start making deals with the devil in order to maintain your advantage. Even if I might make a little less money, I’d move any company I was in charge of away from a cost leadership strategy, if only so I could sleep soundly at night.

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You might say that in some instances cost leadership is the only viable option. Well, then just quit. Why would you want to be part of something like that?

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