The value of unhappy customers
Strategy guru Michael Porter says businesses should focus only on the customers they want, writes Fiona Smith.
If you want to have a solid business strategy, you have to stop chasing every dollar and get used to turning customers away, says Harvard Business School professor, Michael Porter.
Porter says good strategy is about identifying which customers you want and how you can serve their needs in a unique way.
It is about creating a positive sum competition, "rather than being sucked into a zero sum competition where you and your competitor are just trying to do the same", he says.
Porter, regarded as the "father of modern strategy", was speaking at the World Business Forum in Sydney on Wednesday and highlighted two key features of a good business strategy.
1. Choose a distinctive value proposition.
Porter says leaders must decide which customers they are serving and then work out what are the needs of those customers that the business is a "master" at fulfilling.
"We can be pretty good at some things, but what are we going to stand out on? Customer services? Product design? Customisation? Which particular needs of that set of customers do we really want to meet and what price will we ask?"
Leaders should decide what the value proposition is and how it compares with competitors.
"Because, unless we have a unique value proposition, unless we have different answers to these questions than our competitors, then we have no strategy. We are just competing on operational effectiveness," he says.
Porter says Ikea is an example of a company that knows what it is, and who it serves.
"All you have to do is walk in there and take a look at it. You'll see what they are doing . . . and you know they are about style, they are about functionality about good quality, but they are about virtually no customer service.
Porter says the choices Ikea made allow the company to offer prices that are "breathtakingly low" to the quality.
2. Tailor your activities to that value proposition.
"The essence of strategy is making choices," Porter says.
"You have to make choices about how to market, how to sell, how to service. You can't just keep doing the same thing as your competitor and then try to do it better.
"That's operational competition, that's not strategy."
Ikea made choices about how to configure virtually everything in the value chain.
"So the essence of their insight, that unlocked the secret code . . . was the idea of modularity of the actual furniture itself and the idea that the customer could put the furniture together themselves," he says.
Ikea don't have to ship furniture to its stores. "All they ship is boxes of parts of furniture and - from the size, weight and logistics efficiency point of view - that's huge."
It also does not have to deliver furniture to customers' houses.
This could seem a crazy idea, but for the customer, who is getting affordable, stylish and good quality furniture, it is no problem.
Many people are uncomfortable with trade-offs. "We don't like the idea", he says. Our instinct is to give the customers what they want.
"One of the things I like to say - and this may be shocking - all good strategies must make customers unhappy.
"Because if you try and make every customer happy, there is no strategy.
"You have to figure out which customer you want to delight and . . . become world class experts in what delights them. And then all those strays that wander in to our lives, we just have to be nice and be polite, but that is not who we want to serve. It is very hard to do."