Wednesday, December 5, 2012
Selling the Simple Ingredients of Success
One of Trader Joe's keys to success is its philosophy of keeping things simple. It carries far fewer variations of products then its competitors, and its stores are markedly smaller. As illustrated in "Simple Rules for A Complex World" by Donald Sull and Kathleen M. Eisenhardt, it is often the company that can retain its focus over time on its core competencies that achieves success, instead of the one that makes desperate gambles or tries to capitalize on the "hit of the moment". Trader Joe's uses simple rules, such as only picking the best products, and undercutting the price of competition by keeping firm "private label" agreements with its distributors. This agreement is often extremely secretive, so that customers (and competitors) rarely can compare products based on anything else than price and ingredients, instead of branding.
The strategy of remaining simple is one that is often lost as companies start experiencing growth and success. Instead, a need to branch out and expand product offerings in order to please shareholders or increase growth in unsaturated markets often drives companies into risky endeavors that may not hold as high of a payoff. A classic example is GE, who jumped on the financing bandwagon when economic times were good and its cash reserves were flush, but forgot where its core competencies truly laid ("in making stuff" as simply stated by its CEO Jeffrey Immelt). GE has recently made efforts to return to its roots of manufacturing, and is looking to expand geographically and into tangent markets while still staying near to its core.
IBM has encountered a similar issue, and thought that their times as a producer of mainframes and personal computers would last indefinitely with the same return on investment. However, that time quickly faded, and IBM was forced to cut back on its offerings. Instead, IBM realized that it had developed a core competency in the IT services industry (which were often provided to its clients for free along with its hardware), and learned that it had to pair down its focus (and offerings) and instead narrow its concentration.
In the case of Trader Joe's, it appears that it already has carved a market niche for itself by selling its limited private label products, however it will remain to be seen whether it will be able to hold its singular focus. Already, it is seeing reactions from its competition as they look to establish their own private label products, as well as create similar smaller specialty stores.