Wednesday, December 4, 2013

“Tilting” competitive advantage

In the book Tilt: Shifting your strategy from products to customers, author Niraj Dawar, a professor at Ivey Business School, argues that conventional wisdom says that competitive advantage resides in products and their innovation. However, in today’s times the competitive advantage is increasingly “tilting” towards downstream activities that are aimed at reducing customers’ costs and risks. On the other hand, the traditional upstream activities like sourcing, production, logistics are increasingly being commoditized or being outsourced. Author proposes that to compete effective companies need to shift their strategic focus and emphasize on how they define their competitive set, influence customer’s activities, innovate to solve customer problems and build advantage by harnessing networks that address these issues.

The idea is that the center of gravity in business is shifting from the products to the needs of the customer. Therefore, strategic question for driving businesses is not “what else can we make?” but “what else can we do for our customers?” the author emphasizes this point by using the classic thought experiment in branding. It is to ask what would happen to Coca-Cola’s ability to raise financing and restart operations if all of its physical assets around the world were to mysteriously go up in flames. The most common answer is that Coca-Cola would have little difficulty finding the funds to get back on its feet. The company would survive such a crisis because the value of its brand would attract investors looking for future returns.

On the other hand, asking what would happen if instead of the loss of the physical assets, seven billion consumers around the world were to wake up one morning with partial amnesia and could not remember the brand name Coca-Cola or any of its associations. In this latter scenario, despite Coca-Cola’s physical assets remaining intact, most reasonable business people agree that the company would find it difficult to attract significant further investment. The loss of the downstream asset, the brand or indirectly the customer, is a more severe blow to the company’s ability to continue business than the loss of upstream assets.

In order to define the strategy focused on downstream activities managers need to focus on three major tasks. First is shaping customer perception. Firms need to understand that they have the power to change customers’ purchase criteria. When Steve Jobs was asked about market research that was done for iPad, he replied “None. It’s not the job of customer to know what they want.” It might be cliché but building trust and brand loyalty is important. It is getting even more relevant as companies begin to compete for a very small slice of space in consumers’ minds.

Second is innovation. Companies have traditionally invested in innovating products and setting up R&D labs. However, in this tilting situation innovation is more important in terms of how service is provided and how consumer’s costs and risks can be reduced. Hyundai innovated an excellent sales model during the 2008-09 recession. Auto sales tanked, and companies were struggling. Hyundai, instead of lowering their prices, asked the consumers why they are not buying cars. Hyundai found that the risk of buying a car is too high given the uncertainty in jobs. Hyundai innovated a Hyundai Assurance Program where if people who bought cars lose their job or income within one year of buying the car, they can return it with no penalty to their credit rating. At the time when industry sales declined 37%, Hyundai doubled it sales.

Third is to build accumulative advantage. When competitive advantage lies in products, it is lost over time as competitors catch up. However, when competitive advantage lies in downstream activities it grows as the number of consumers served grows. Companies that gain competitive advantage in downstream activities do so by creating barriers for consumers to switch platforms. Facebook has created and harnessed a network of consumers. It has services like time lines, photo sharing, games, and apps. These services make sure that users stay on Facebook and the more users stay on Facebook, the more likely their friends will stay on Facebook.

Author argues that this “downstream tilt” is relevant to three types of companies: those in product-based industries like pharma, those in maturing industries, and those seeking to move up in the value chain. Developing downstream competitive advantage will allow companies to create unique differentiation for themselves, and this is something that can be nurtured and accumulated over time.





References:
  • Tilt: Shifting Your Strategy from Products to Customers, Niraj Dawar, HBR Press 2013
  • When Marketing is Strategy, Niraj Dawar. HBR December 2013

1 comment:

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