Don’t be the Best! An Amazing Business Strategy

In school, we are asked to top the class, be the best in basketball, win the first prize in debate, etc. Being the best is something we all are trained right from childhood. Being the best is surely the absolute way to succeed in many fields. For example, in professional sports, all sportsmen train and practice in similar ways but the ones who end up being the best, only play at international level. And the very best wins.?

Does the same principle of being the best, to be the most successful, necessarily apply to the more complex business world??

Trying to be the Best may even be Harmful

Often many companies end up with similar products and positioning in the market. Most of them end up around the same level of excellence, even the best is not significantly better. Generally, customers can neither recognize such small differences nor do they care about it. Ultimately, price war takes the front seat in the attempt to acquire more customers and thus cutting the profit margins for all the players. The battle to be the best turns out to be a curse even for the best.

One of the best examples of this phenomenon is Gmail. When it was launched, it was the best email service compared to Yahoo, Hotmail and many others. Being the best, Google wanted to charge users to use Gmail. But ultimately, Google had to keep the price to zero just like other providers in order to compete.?

Being the best is often not enough to be the most successful in business. In the 90s, Apple was way behind Microsoft despite being considered the best by industry experts. Kingfisher and Jet airways had to shut operations despite being the best air carriers in India. And so on.

In business, often doing something different or the same thing differently is the real mantra or strategy to success.

McDonald’s?

Most restaurants provide many types of dishes and compete head on by being better than others. McDonald chose to focus on one specific dish (burger) and designed a new process to make standardized burgers. This enabled a much lower cost of production compared to others and ability to scale to many outlets without affecting quality. This enabled McDonald’s to provide decent burgers with consistency of taste across all outlets. And all this at lower cost than others without affecting profit margins.?

Google-Bing-Quora

In an attempt to defeat Google in the Search business, Microsoft Bing ended up being very similar to Google Search. For a normal user, even Bing is good enough. But Microsoft has been unsuccessfully playing the game of being the best. Quora, on the other hand, smartly played ‘being the different’ game. Unlike Google where you can search anything, Quora is designed specifically to ask interrogative questions starting with what, where, how, etc.?

For such questions, Google presents the user with relevant web pages written by anyone. Quora, on the other hand, provides answers written by experts in that domain. Due to this, users flock to Quora for such specific questions. In fact, if such questions are asked on Google, even Google suggests Quora pages thus helping Quora.

Patanjali

FMCG players had been fiercely competing in the Indian market. Patanjali hit the market with such a success that all other players could only see with awe. While other players, including Indian players, flooded the market with western chemical based products, Patanjali projected itself as a pure ayurvedic player and went beyond the competition.

When a company tries to be better in doing the same thing as competition, it is like multiple lions in the same territory fighting to rule. All end up bleeding each other. When you do things differently, you create your own undisputed territory.

Zappos

Zappos, a shoe selling ecommerce player in the US, created a very unique differentiation leaving Amazon no choice but to acquire it. Ecommerce players mostly play on low cost and quick delivery. Zappos played on exceptional customer service. Their customer service would even send flowers to customers to make them happy, discuss their personal life problems, and talk with them for multiple hours. Had Zappos played on the cost and time to delivery, Amazon being the champion in these aspects could have crushed Zappos. Amazon did crush many by selling at prices much below the cost price.?

By doing something different, Zappos created a new battlefield where Zappos and not Amazon was an expert.?

Flip side of Differentiation

The flip side of differentiation is that when you try anything new, the chances of failure becomes higher as either market may not accept it or there may be a fundamental huddle in execution which you end up finding out only later.? When you copy something already working in the market, it has lesser reward but lesser risk as well.?

Some entrepreneurs and investors prefer one side of the tradeoff, and some the other.?

Protecting the Differentiation

Once Ola & Uber became popular in the Indian market, Jugnoo created a differentiation by creating a similar platform but for Autos, not Taxis. This differentiation gave Jugnoo a very good boost as many customers would prefer lower cost Autos. But very soon, Ola and Uber also added the Auto feature to their app. Then the differentiation of Jugnoo was killed and so was Jugnoo.

Differentiation can only be short lived if not protected. Protection needs to be done against two types of competitors: Existing players and New entrants. Different dynamics work for both types of competitors.

Protecting from Existing Players

Ikea is a highly differentiated company. In other furniture shops, you select furniture which gets delivered to your house after a few days or weeks. In Ikea, you take the furniture home as you walk out of the shop. A great plus point. However, the furniture here needs to be assembled by you at home. Self-assembly furniture allows Ikea to store, transport and display furniture at lower cost. Customers get lower prices along with immediate take away.?

I am sure you are able to see a trade-off here……in fact, not one but two trade-offs. Not all customers want to assemble furniture by themselves. Ikea traded that off with price plus immediate take away. But the true magic lies in the other trade-off.

When Ikea provides self-assembly furniture, most of its business divisions like designing, manufacturing, storing, transporting works differently compared to other big players. Now, what if a big furniture player tries to copy Ikea? It will have to change all its processes to Ikea’s way. In that attempt, it will lose its current value proposition which is good enough to satisfy current customers who prefer not to assemble by themselves. So, it makes sense for it to live with the current side of the trade-off.?

In the case of Jugnoo, when Ola tried to copy Jugnoo, there was no trade off that Ola had to face. Rather, Ola could just channelize its existing processes to add an additional feature of Autos without compromising its value proposition for Taxis.

Trade-off based differentiation (as in Ikea) cannot be copied easily by existing players but non trade-off based (as in Jugnoo) can be.

Airbnb is another great example of trade-off based differentiation. As a customer, when I choose Airbnb, I get unique types of stays with local families hosting me. But I do sacrifice other comforts which I get in proper hotels like a 24x7 help desk, 24x7 room service, inhouse multiple dining options, etc. Many companies like Expedia, TripAdvisor, Booking compete in the later segment. Some of them have tried to copy Airbnb but could not do so effectively as the whole supply and demand chain works differently for the two value propositions.

Very often, specially in traditional companies, trade-off differentiation is created via brand positioning as well. Lux and Liril are in the same price range, very similar soap products and by the same company Unilever. Liril has been positioned for energetic youth and Lux as a pure beauty soap. With this positioning, Lux cannot become Liril and vice-versa.

A big pizza chain created a non trade-off based differentiation in India by adding Indian flavored pizzas to the menu like paneer-tikka pizza and so on. It helped the company to grow but only till others copied it.?

Trade-off based differentiation may be superior but non trade-off based differentiation is not useless. When you do this type of differentiation, you can take advantage of it till the competitor takes notice and copies. And many times, competitors may take substantial time to copy. The differentiation may be too complicated to copy, competitors may not consider initially the differentiation to be important enough or they may not simply be on their toes. Many times, large old corporations become bureaucratic and thus slow. They tend to react to competition much slower than aggressive agile start-ups.

WhatsApp has been the undisputed leader in its space. Telegram came up with new features like disappearing messages, chatting without sharing numbers, etc. which allowed more data security to users. It also allowed larger chat groups compared to the limit of 256 members in a WhatsApp group. But WhatsApp started copying these features very late. By then, telegram grew to a really big size.

Non trade-off based differentiation can become deadly if protected by intellectual rights. Pharma companies have patents to protect their new products for 20 years from competitors. That enables them to milk money by avoiding competition.?

Branding: A Golden Way to Bypass Differentiation

Most buyers cannot judge if a laptop is really good or not. But, if it’s a Dell, it must be good. Brand evokes trust in the buyer so the buyer is willing to pay a premium for that compared to non branded companies even if the products are the same. This works well even for B2B buyers.?

Great magic happens when a luxury B2C brand is created. Customers may pay more for Dell compared to an unknown brand but Dell does compete on price with other known brands like HP and Lenovo. But Apple and Microsoft Surface, luxury laptop brands, do not compete on price even among themselves. When it comes to luxury, high prices give the perception of better; in fact lower prices can actually hurt.

Sometimes, some B2C companies like Nike, Apple, Coke, Rolex are able to create great emotional connection with potential customers. Then customers start buying from the heart. Such brands sell more, that too at higher prices, compared to otherwise equally good weaker brands.?

Protecting from New Entrants

Does the trade-off based differentiation help keep away new market entrants? The new entrants have no existing way of doing things. So for them, copying the differentiated way of doing things is the same as copying the status-quo. New entrants can be more dangerous!

However brand creation and IP protection does protect from potential new players.

Scaling up very fast is often the best bet against new players. When you scale, you can create several types of moat which can put new players at a serious disadvantage.

Cost Advantage

In many industries, as you scale, your costing decreases. When car companies produce at scale, price comes down. Because of its scale, Walmart can purchase at lower rates.

Ecosystem of Product and Services

Windows is by far the most successful Operating system for PCs. Is it the best OS? Even if one gets an OS many times better than Windows, one may not use it. The reason is that Windows is not alone, there are plethora of other software which work on Windows and will not work on the other new OS. In the words of Bill Gates himself, this is the biggest reason for the success of Windows over decades.

Tesla is trying to build a similar ecosystem around its electric vehicle by enabling Tesla compatible accessories, software, charging stations, etc. which will not possibly work with other new competitors. Google is trying the same in the online space.

Network Effect

In network effect, a company becomes more useful as more users use it. Social media is a great example of it. This by definition means that new players will find it harder as it will have lesser users. Thus many players failed badly to copy Facebook, WhatsApp, etc.

But network effect has one more lesser talked advantage. At times, even if a competitor comes up successfully, you may still not lose your ground that easily. Telegram competes with WhatsApp as we discussed. But even the users who prefer Telegram cannot leave WhatsApp as not all contacts will be using Telegram.?

Switching Cost

For instance, CRMs enjoy this. If a company wants to change CRM, it may not be easy to transfer all data and more importantly, training the team for using the new CRM is tough.

If a company with a switching cost advantage captures a large portion of the market, the new player will find it very tough to switch these customers to itself.

Market Place

Market place is a strong moat. Buyers benefit when there are more sellers. Sellers benefit when there are more buyers. A new player will have less of both so will not be attractive to either side.

Knowledge

In certain highly technical fields, as a company scales, it may end up building a very skilled team over time. Other companies may not be able to develop the expertise. Texas instruments, Intel, Boeing are just a few examples. Sometimes, the knowledge base may be not in the form of people but in other forms. For example, Google and YouTube have enormous data of users (a form of knowledge) which help them serve users better.

Sometimes, it seems that people based knowledge is not a real moat as a competing company may poach people. It’s true at many places at least if not all. AMD started by pulling many Intel team members and did get success.?

Google was the only player with a knowledge base for making self-driving cars, thanks to its years of R&D.? When Uber wanted to get in the same domain, it pulled staff from Google but still could not succeed much. The reason such things may fail is that many times it’s the whole team plus the environment which creates the magic, not just a few individuals.

The Size Bias

Many a times, no moat is created even with scale. It’s unfortunate but still scale in itself is a moat to a large extent.

When you are big, other suppliers, employees and associates reach out to you to work with you. In fact, they pride themselves in working with you. When a company is small, you are not their first choice, you have to coax them.

A typical customer thinks that if a company is big, the product or service must be good. If a company is small, the customer is skeptical.?

Once scale has been achieved, other entrepreneurs and investors who themselves want to keep away from competition will not jump doing the same. That’s why VCs often refrain from jumping in domains already taken by a company.

With scale comes might. At times, such companies kill small companies by cutting prices unreasonably, threatening suppliers not to work with competitors, etc. Not recommended!

When Scale is a Curse

The same scale, which protects, can destroy when a new technology disrupts the market. The most talked about example of this is the failure of Kodak. Kodak was the leader in film based cameras but was knocked out when companies like Canon, Nikon disrupted the market with digital cameras.

Ironically, Kodak is considered to be the inventor of digital cameras. But when new technologies makes the older product obsolete, old companies find it very hard to cope up even when they know what’s coming because of both psychological and logical reasons:

It’s very hard psychologically to promote the new product which will cannibalize your own existing business. It feels like you, yourself, are killing your own business.?

The new product does not change the market overnight, it takes time to grow and yield large revenue. Till that happens, the large company has to focus on the old stream as it has pressure to deliver revenue. So, the company ends up focusing on the new stream too late when the new entrants have become big enough with their own moat.

Combating the Curse of Scale

Apple killed its own iPod when it launched the iPhone; iPhone could do all that the iPod could do. Apple could do so for two reasons. Firstly, the iPod held only a part of Apple’s revenue, not all. Secondly, Steve Jobs had the extreme courage to rise over the psychological barriers and make the big move.

Many tech giants like Google do numerous start-up acquisitions wherever they sense a possible disruption. In fact, Facebook acquiring Instagram was an example of this. As smartphones reached all hands, Instagram was a disruptive social platform in the new world. It was being believed that it may replace Facebook. So Facebook acquired it.

Summarizing

Once, I was walking through the streets of Germany. I noticed ten odd flower sellers each a few meters apart on a long street. All were the same fundamentally, except one. He had hired a person to sing songs while selling flowers. This marketing differentiation attracted more customers and thus more sales. I wondered why other sellers were not copying this easy to copy non trade off based differentiation. When I talked to a few of them, they said that they were satisfied with whatever they earned and have no need and zeal to copy the differentiation.?

All these business theories are good but they should not be taken perfectly to the heart because business is run by humans. Theories are rational but humans are not always rational and thus we often find cases defying rational business theories.