In an article in the December 2013 issue of the Harvard Business Review, Author Professor Niraj Dawar argues that today upstream activities – such as sourcing, production, and logistics – are being commoditized or outsourced, while downstream activities aimed at reducing consumer’s costs and risks are emerging as drivers of value creation and sources of competitive advantage.
Today the locus of competitive advantage lie outside the firm and the advantage is accumulative -rather than eroding over time as competitors catch up, it grows with experience and knowledge.
Since competitors can emulate, clone, copy or source from the same suppliers and neutralize a company’s competitive advantage, the company has to look outside the firm for competitive advantage. How the market perceives you can be a strategic advantage.
According to the author you can choose to compete with players of your choice, you can change the criteria on which you compete and best of all your competitive advantage can grow rather than diminish.
Understanding the customers’ wants and desires, their buying patterns, their socio economic status, the importance they attribute to certain features or the convenience of procuring the product, the price they are willing to pay for it, all these can be the foundation of your strategy. In the era of social media and mobility the customer is sending you these signals through their expressions in the social media and ratings on the web. Collecting these signals and analyzing them to arrive at your strategy and the next best action can lead to sustainable competitive advantage.
Experimenting with control groups, evaluating the behavior changes as you hold out your marketing messages to the holdout group can provide greater insight into the buyer’s real motivations. This can then lead to different strategies, Costco for example has a triggers and treasures strategy, so the things that you routinely buy such as bread, milk and eggs are priced very low motivating you to go to the club every week, but once you reach the warehouse you are guided thru aisles stacked with seasonal items, high fashion items, exclusives that are only available for a few days and only at certain clubs, so if you procrastinate the first time and want to buy the item the next visit it is gone. You are also motivated to visit multiple clubs to discover what treasures are hidden there. This is a behavior modification technique that leads you to buy the treasures as soon as you find them for the fear of missing out. Leads you to visit the store more frequently, at multiple locations in search of things that you never knew you desired.
Amazon has a convenience strategy and has adopted the club membership strategy of Costco, so now it is more like Costco than Walmart. Be a member of Amazon Prime and you are guaranteed a 2 day delivery at no cost. By ensuring that your buying experience is par excellence, and removing the friction of delayed shipments, Amazon has lifelong converts – who are not just couch shoppers but mobile shoppers too. These customers are so comfortable with the buying experience at Amazon that they stand in the aisle in Best Buy, Target and Walmart, compare prices and order on Amazon, confident in the knowledge that 2 Day shipping means two day delivery no excuses.
These two companies don’t produce the goods that they sell, so product innovation doesn’t play a part in their success, but understanding their customers’ buying behavior is their innovation and strategy. Marketing is the strategy and strategy is destiny. Superior logistics and centralized buying are indeed a part of their success but understanding the customer drives these functions not the other way around. The entire organization is executing flawlessly to deliver the habit forming experience to the customer.