Passion, People and Principles

Strategy, Scarcity and Rewards

post # 99 — June 6, 2006 — a Strategy post

The first thing they teach you in any introductory economics course is that, in a free-market economy, price is set not by inherent value (water is more valuable than diamonds are) but by the relative balance of supply and demand.

As an individual or as a firm, you may be very skilled and talented at what you do, but if 100 other people in town can also do it, you won’t command a high income or be in great demand.

The essence of strategy, for people and organizations, is to find a way to be different. If you follow the beaten path, you will be beaten. Its not winning just to say you can do MORE than others. You need to be able to show thatwhat you have is faster, prettier, easy to use, lighter, heavier or more flexible.

A number of lessons flow from this simple insight. First, it needs to be stressed that the essence of strategy is that not about size, or number of locations or the range of your services. This should be obvious, but it’s astounding the number of businesses that define their success as “growth” and are prepared to do anything to achieve it.

In industry after industry, companies and firms continue to pursue volume strategies. They are always asking “How do we get MORE?” They don’t seem to spend anywhere near a much time asking “How do we get BETTER?” (In ways that matter to the customers?)

Of course, getting better is MUCH harder work than adding volume, locations, staff, service-lines, new products and new markets – so companies avoid doing it. It’s harder to invent metrics that show you are getting better – easier to show you are getting more.

Strategy is also the recognition that you don’t have to be great at everything. What you do have to do is to pick one or two things and do those better than anyone else and you’ll have enough for a lifetime of success.

Thomas Jefferson couldn’t give a speech well, couldn’t lead and never faught. But he could write better than any other man of his generation! His entire career before, during and after the Revolutionary War derived from that one talent.

Company or individual, your challenge is to find your angle. What can you make yourself truly special at?

And when others start copying your success, what’s your Act 2 going to be?

3 Comments

Ric said:

It seems so simple, yet is so rarely understood by organisations (and individuals) – “The essence of strategy, for people and organizations, is to find a way to be different.” Given that this is so, whay the rush for “best practice”? Isn’t that just “was good practice at the time in those circumstances”?

posted on June 6, 2006

Michelle Golden said:

Excellent post, David. I agree entirely with your strategy and differentiation statements. With your price example, though, I’d like to suggest that, while scarcity or supply and demand does significantly impact price where there’s a mass offering of a product or service without regard by the seller of the application and usefulness of the product to the buyer, the value to the unique buyer will vary substantially as the cost/benefit to the buyer varies. While situational need may drive the ability to price higher (a tire store beside a potholed road, ice/water in the desert, etc), price can also be based upon the unique buyer’s level of appreciation for the product. Determining the value will take conversation and care on the seller’s part to understand the buyer, so it only makes sense where the stakes are high—not in a cookie-cutter product setting. Water only commands a better price than diamonds where it is not plentiful or available at a lesser price.

posted on June 6, 2006

Warren Miller said:

Michelle, I think you may be unwittingly repeating David’s point: that the way to escape the ravages of price based on commodity-type supply-demand parameters is through differentiation. W/sufficient differentiation, price becomes a matter of perceived value to the buyer. Porter said much the same thing in this “What Is Strategy”? classic in HBR in 1996: “Competitive strategy is about being different. It means deliberately choosing a set of activities to deliver a unique mix of value” (Nov-Dec., p. 64).

The wonderful thing about differentiation is that the potential sources are limited only by management imagination. . .and grasp of reality. Think Chiquita bananas: they even have a song. If Chiquita can differentiate those yellow “commodities,” lemme tell you, there’s hope for all the rest of us!

Warren D. Miller, ASA, CPA

Beckmill Research

Lexington, Va.

posted on June 6, 2006