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At your next strategy retreat, ask yourself: how different are we?

Mar 29, 2010 Business Daily, Strategy

“In the 1980s, competition from Japan was every western CEO’s worst nightmare. Whether it was TVs, VCRs, or fax machines, Japan’s ability to produce high-quality goods at low cost drove U.S. and European competitors out of those businesses. Since then, Japan has floundered for more than a decade. Why? A big piece of the answer is poor strategy. So many Japanese companies competed by imitating each other in every dimension – serving the same customers, with the same products – that they achieved the business equivalent of a pyrrhic victory. As a group, they won the battle in consumer electronics. But they won in a way that destroyed their ability to make money.”

JOAN MAGRETTA, What Management Is (2002)

Joan Magretta’s banally titled book is full of surprising management insights, and is well worth reading. The excerpt above reveals a little-addressed aspect of Japan’s recent decline – the Japanese were simply not that good at strategy.

The author puts it very succinctly: strategy is not about being the biggest or the best; strategy is about being different. Too many people confuse operational effectiveness, product quality or low costs with strategy. Strategy is actually less about doing things better than others; it is more about doing different things, or doing things differently.

Ask any economist: the last thing you want in your industry is perfect competition, a state in which the ingredients of success are freely available to all and are replicated by all. This creates near-identical products delivered to the same customers in much the same way. Customers have little with which to distinguish between companies, and tend to be indifferent in their preferences.

Think about it: can you really differentiate between a Canon or Olympus camera, or a Panasonic or JVC television? If you look at competing Japanese products in the same price bracket, you will be confronted by near-identical appearance, specifications and features. You are likely to base your decision to buy on a minor price difference, or a trivial visual feature, or on the recommendation of a shop assistant. The products themselves are virtually indistinguishable from each other.

If your products fall in that category, you had better be worried. What results is the erosion of price premiums and emotional appeal, and that will murder your bottom line. As Ms Magretta points out, Japanese electrical products as a group did indeed wipe the floor with the weakest of the European and American competitors: who remembers Granada and Tandy and the like anymore? But they left standing a smaller group of highly effective, highly differentiated smart players: Bose, Bang & Olufsen, Bosch, Miele, to mention just a few. These were competitors who chose to be different: to offer highly differentiated products to select customers. They saw the low-cost tsunami coming from Japan, and retreated to higher ground. That positioning has served them all well.

Meanwhile, Canon, JVC, Sharp, Panasonic and the like all pounded each other into the ground. They added more and more features at lower and lower prices, until none of them was making a “supernormal” return. They invested heavily in tangibles like product performance, and largely ignored intangibles like appearance, brand, reputation and desirability. So yes, we customers all benefitted – but the companies in question were running to stand still.

That is a cardinal error, one that you would do well to avoid. In the knowledge economy what differentiates companies are not plants or resources: to be different, you have to focus on intangibles. How appealing is your brand? How emotionally bonded are your customers? How superior is your reputation for service? How exclusive is your know-how? How unique is your research and development? How much enthusiasm can you ignite in your staff?

Those are the real questions of modern business strategy. Try asking them at your next strategy retreat.

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