Strategic Positioning & Competitive Advantage

The bargaining power of suppliers and vendors is one of the Five Forces that Michael Porter identified that determine industry structure and attractiveness.

In many ways the bargaining power of suppliers is the same as the bargaining power of customers but seen from the other party’s perspective.

Powerful suppliers in the industry value chain can squeeze profits out of customers and the customers’ customers by establishing a dominant position which gives major strategic control over the entire industry. Good examples are Microsoft and Intel in the PC industry who make very high profits when other parts in the value chain struggle to make profit.

Rather than repeat what I wrote on customer buying power I thought I’d look at uses and abuses of the bargaining power of suppliers.

Uses And Abuses Of The Bargaining Power Of Suppliers

I take a very pragmatic view of what is a use of abuse of bargaining power:

• Use is when you are able to use bargaining power to increase your profitability.
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• Abuse is when bargaining power of suppliers is used against you to “steal” your profit.

I therefore see using bargaining power as an offensive strategy as you establish advantage while you need a defensive strategy to protect your business against abuses of the bargaining power.

It’s interesting to look at both sides of the situation like this because there is a tendency in negotiations to assume that the other person has a stronger position than they actually do. This feeling of weakness can make you concede too much too early because you fear the other side will walk away.

Using The Bargaining Power Of Suppliers To Increase Your Profitability

In this situation, you are intending to use the bargaining power that comes from your position as preferred supplier to increase your prices and capture more margin from customers without losing sales to lower priced competitors; or

Low competitive rivalry is a key issue to stop the competitive process forcing down prices.

Collusion and cartels are illegal and severely punished but some industries (which score well on the other Five Forces) settle into a comfortable existence with either businesses operating from their own differentiated positions in niche markets or, if differentiation hasn’t been established, the market share leader can set prices and enforce disciplined pricing by targeted responses.

Cyclical industries which exaggerate the effects of the economic cycle, like the steel industry, are constantly trying to balance demand and supply by increasing or reducing capacity. What is normally a buyer’s market can shift suddenly when suppliers have cut back capacity and demand starts increasing. I’ve seen prices increase very rapidly as suppliers ration out what’s available to desperate manufacturers eager to fill their own increased demand. As capacity gets added back, prices level off and then start reducing but high profits can be made in the early upswing of the economy.

Switching costs are an important issue which lets suppliers exert their bargaining power. These may be high business specific investments in equipment, technical issues that create compatibility problems with using goods from other suppliers or favourable terms of trade (e.g. extended credit subject to certain volumes, loans of equipment e.g. the freezer for ice cream).

Some switching costs create a hurdle at the beginning of the relationship as well as a barrier at the end.

Other switching costs that enhance the bargaining power of the supplier come from being excellent at what they do. The quality or service provided might become an integral part of the buyer’s own value proposition to its customers. The thought of switching to another supplier can create high levels of business risk and personal stress to the decision maker. IBM did very nicely out of the idea that “no one gets fired for buying IBM.”

Some firms will look along the industry value chain and believe there are opportunities for profit by vertically integrating forward into their buyers’ markets. There may be distinct advantages through better coordination which would give the business a competitive advantage over its customers in their markets. Suppliers can use the threat of vertical integration to exercise their bargaining power (if we don’t meet our profit targets doing what we do, we’ll have to look at competing with you.)

Defending Against the Bargaining Power Of Suppliers To Protect Your Profitability

In this situation, you are defending against the abuse of bargaining power by a powerful supplier.

An interesting example of excessive bargaining power is Premiership football in England where the clubs manage to get very high payments for TV rights but then, instead of keeping a share of this as profit for the shareholders, the money is paid out to the pampered footballers.

While businesses can’t form cartels to fix prices, employees can join trade unions and use the power of collective bargaining backed up with the threats of works-to-rule and even strikes. Businesses can form buying groups to increase their bargaining power. I’ve worked in several industries where these groups were able to establish 10% to 15% discounts compared with independents.

Buyers can look across supplier markets for alternative supplies. For example, I used to work for an electrical fittings company with an iron foundry and steel press-work. While we operated in a niche market selling to electrical wholesalers, the larger wholesalers could have gone out to the general foundries and steel fabricators and bought the tooling required to make the high volume items.

Buyers also have the option of vertically integrating backwards if they look at the make or buy decision and decide that the potential savings justify the trouble of manufacturing their own supplies.

Labour & Unionisation To Increase Bargaining Power

Don’t get trapped into thinking that suppliers / vendors only supply materials and components.

It includes all costs and one of the biggest is labour which may be unionised. This can be a significant source of competitive advantage or disadvantage depending on the position of one business compared to its peers.

Unionisation may have a double negative impact on the ability of the business to compete (and to continue to provide employment):

• Wages and salary rates may be higher through collective bargaining and pressure to maintain pay differentials whilst moving up the pay of the lowest paid.
• Restrictive practices may cause low productivity and unnecessary delays in the operational processes.

Do You Have Other Examples Of The Bargaining Power Of Suppliers?

If you have experienced other examples of using the bargaining power as a supplier, or defending against the abuse of bargaining power, then please leave a comment.

More On Michael Porter’s Five Forces

If you found this article on the bargaining power of suppliers helpful, then take a look at my other articles on Michael Porter’s Five Forces:

Five Forces Analysis

Threat Of New Entrants

Bargaining Power of Customers

Threat Of Substitutes

Competitive Rivalry

Michael Porter’s book Competitive Strategy is difficult to beat if you want to look at the Five Forces in detail and their impact on strategy. Although it is over 30 years since it was published, it is still essential reading for any strategy specialist.

Effective strategy is a mixture of defensive strategy and aggressive strategy / offensive strategy to help a business to protect what it’s got and then to make gains in a competitive market.

Use The SPACE Matrix To Check If An Aggressive Strategy is Appropriate

The Strategic Position and Action Evaluation Matrix (SPACE Matrix) is a very useful guide to help you to decide which strategy is most appropriate in which situation.

The SPACE Matrix assesses the business across four dimensions

• Industry Attractiveness (IA)

• Environmental Stability (ES)

• Competitive Advantage (CA)

• Financial Strength (FS)

to come to a recommended strategic thrust which can be:

• An Aggressive strategy
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• A Defensive strategy
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• A Conservative strategy
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• A Competitive strategy

The diagram above shows favourable positions in all four dimensions and therefore the business can follow an aggressive strategy as it leverages its strengths into the opportunities available – see SWOT Analysis for how strengths, weaknesses, opportunities and threats fit together in business strategy.

The strong position in environmental stability means that the business does not have to hold back a good proportion of its financial strength to protect the business in difficult times but can be used to finance growth strategies – see the Ansoff Growth Matrix.

The business is also blessed because it has a good competitive advantage in an industry which is considered to be attractive.

Aggressive Growth Strategies Recommended By The SPACE Analysis

SPACE Analysis recommends that businesses in such a strong position take the following actions:

1. Continue to invest in innovation to sustain and build the competitive advantage which exists.
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2. Cover any moves made by competitors to develop alternative competitive advantages. Close off the opportunities to build a differentiated value proposition that may prove attractive to segments of the market.
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3. Aggressively build market share by moving above the fair value line in the customer value map.
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4. Raise the stakes for other competitors to play the game. This may be through rapid product innovations, marketing campaigns or reducing prices to levels that competitors find difficult to match.
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5. Grow within the market through acquisitions.
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6. Follow up on possible opportunities in the market including backward or forward vertical integration.
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7. Move into related markets which complement the existing position.

This aggressive, offensive strategy will make it tough for competitors to trade and certainly difficult to build up the resources to challenge for market leadership unless they have very deep pockets.

The two big concerns in this very favourable position are:

1. Avoid complacency – business can seem also too easy but new threats may come from substitute markets or as technology makes different sectors converge.
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2. Avoid running foul of anti-competition policies. Sometimes a business that is too strong can attract the attention of regulators and especially if it uses predatory pricing aimed at driving competitors out of business.

Offensive Strategy For Marketing & Business Warfare

Business strategy and marketing are often compared to military strategy with its focus on defensive and offensive strategies.

The analogy can be pushed too far in my opinion but it is useful to see how offensive strategies in warfare can be adapted to the business world.

Offensive Strategy As A Frontal Attack

In a frontal attack you would target a competitor in the area of its strengths. In the customer matrix you target the same basic value proposition using either a lower price or a large-scale marketing campaign.

If you win it’s through brute force, not subtly. The competitor immediately knows that it is under attack and is likely to respond vigorously. This makes frontal attacks very risky and often expensive.

The targeted competitor may well have the advantages of a low cost position and strong, committed relationships with customers.

A frontal attack is only a viable offensive strategy if:

• The market is commoditised with few little differentiation and standard customer needs.
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• The brand equity and customer loyalty for the targeted competitor is low.
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• The targeted competitor has few financial resources (or strong allies) relative to the financial strength of the attacker.

Porsche have done very well by creating a new product category with the Porsche Cayenne, a luxury, extreme sports utility vehicle. With the introduction of the Kubang, Maserati have launched a frontal attack on Porsche (see Maserati Kubang.)

Offensive Strategy As A Flanking Attack

Instead of attacking a competitor where it is strong in a frontal attack, a flanking attack looks for weaknesses in the competitors product range and attacks there instead.

In the customer value map, the competitor may be attracting business it is the best option without being a close fit with the needs of the market segment. This makes it vulnerable to a flanking attack from a competitor who produces a differentiated product targeted at a specific niche. While the competitor will be aware of the aggressive competitive move, it may not be particularly concerned if little volume is looked threatened. It may decide that the size of the market is not worth the fight providing its core market position is not threatened.

The competitor may not even compete in the segment that has been attacked in the offensive marketing strategy but the aggressor may see it as a very important beachhead to move from.

Japanese cars entered both the UK and the US markets at the low price low value end of the customer value curve. Particularly in America where the incumbent cars were huge, this was a flanking attack which was ignored because “Americans don’t buy small cars.” Well Detroit got that wrong!

The same thing happened with motorcycles in Britain. The traditional bike manufacturers were happy to pull out of the low profit small bikes to concentrate on the profitable super-bikes. The Japanese bike manufacturers gradually introduced bigger bikes until the British motorcycle industry couldn’t sustain itself.

Offensive Strategy As Encirclement

In the encirclement offensive strategy, the targeted competitor is attacked from two or more directions at once to confuse the response.

For example on the customer value map, the aggressive competitor could launch three new products:

1. At the same value point as the incumbent but without the aggression involved in the frontal attack.
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2. Below the value point to attract price switchers who don’t appreciate everything that the incumbent offers.
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3. Above the value point to attract customer segments who feel under-served by the incumbent and who are willing to pay a premium price.

The company that is attacked has to deal with three threats at once and if it cuts price to fight off the low priced offering, it risks the price reduction spilling over into the other customer segments.

While the encirclement offensive strategy is difficult to defend against, it is also difficult for the aggressive competitor to do since it has to be able to launch three products either at once or in rapid sequence while the competitor is still off balance.

Offensive Strategy As A Bypass Attack

In this version of offensive strategy, the aggressive competitor does not go head-to-head against the incumbent competitor but instead targets areas where it isn’t. While this isn’t a direct attack, it can be thought of as a pre-emptive strike into new markets and new complementary products (see the Ansoff Growth matrix) and is likely to be targeting the incumbent’s own offensive strategies.

More Details About Offensive Strategies

I’ve read several strategy books that look at strategy as warfare which I will be reviewing over the next few months.

I have a general criticism of strategic planning that insufficient consideration is given to competitive moves and counter-moves so these ideas on defensive strategies and aggressive strategies are important.

If you are not keen on the military analogy but want a more general perspective, then Michael Porter looks at attack and defence in his book Competitive Advantage.

The value disciplines are an interesting extension to Michael Porter’s generic strategies for competitive advantage.

The Origin Of The Value Disciplines

The value disciplines have been developed and promoted by Michael Treacy and Fred Wiersema in a famous Harvard Business Review article “Customer Intimacy and Other Value Disciplines” and in their book “The Discipline Of Market Leaders”.

The conclusions are based into research into successful businesses in the USA and Europe and emphasise the importance of market segmentation and staying focused on the key success factors of your decision.

The Three Value Disciplines

The three value disciplines are:

1. Operational excellence – based around the market segment who want a standard product at a low price
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2. Customer intimacy – based around the market segment who value customised products and close relationships
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3. Product leadership – based around the market segment who want and appreciate the latest innovations and fancy product features

According to Michael Treacy and Fred Wiersema, every market divides into these three generic segments although the size of each will vary.

For a firm to be successful, it must choose to follow one of the value disciplines while striving for reasonable levels of performance in the other two.

The Value Discipline Of Operational Excellence

The authors define operational excellence as “providing customers with reliable products or services at competitive prices and delivered with minimal difficulty or inconvenience.”

At first glance that sounds like a low cost operator providing a standard product and winning business by providing it at the lowest price in the marketplace. That doesn’t sound like it offers much opportunity for differentiation.

It’s certainly true that firms following the operational excellence value discipline will tirelessly look for ways to take cost, time and energy out of the production process.

But it doesn’t mean that the customer doesn’t value the “quick and easy” way of doing business with a company following this strategy.

Price is one factor in the buying decision but I’d like you to just stop for a moment and think about examples where you wanted to buy but the supplier got in the way:

• what you wanted wasn’t in stock
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• they couldn’t get it quickly enough
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• the transaction was difficult for some reason – poor knowledge, bad attitude, difficult payment process etc

It’s true that if multiple competitors in a market follow the operational excellence value discipline there will be a tendency towards commoditisation but that doesn’t mean that they will all excel at all aspects of operational excellence.

Trade-offs exist and even in a commodity business like steel, there is a chance to emphasise different aspects of operational excellence like cost, quality, speed and reliability of delivery.

The Value Discipline Of Customer Intimacy

In this second of the value disciplines, the focus moves from internally within the business to the customers.

In particular how the market can be segmented into different groups of wants and needs and how products can be created to closely fit the requirements of the niches.

Businesses that choose to excel at customer intimacy will also need to develop flexible operational capabilities to allow products to be customised to meet special requests from customers.

The customer intimacy value discipline is very much one of product and service differentiation.

Recognising that the market has many combinations of needs doesn’t mean that the business has to offer solutions in all of them. It can pick and choose which are most appropriate to its capabilities and where the biggest opportunities appear. This means that many competitors can follow a customer intimacy strategy without driving the market towards commodity levels.

Following the customer intimacy value discipline rather than operational excellence will move the focus away from transaction profits to customer lifetime relationship profits.

The Value Discipline of Product Leadership

In the third value discipline, the emphasis moves away from the customer and its current needs towards creating a continuous stream of state-of-the-art products and services which anticipate and create future customer needs.

Companies following the product leadership strategy know that they must make their own successful products obsolete with the next generation of solutions, because if they don’t, a competitor will and the business will lose its reputation for product leadership.

This product leadership value discipline is another classic differentiation strategy focused on providing unique features to win customer preference.

The emphasis is on generating new innovations and speed to market them before a competitor can beat them to the punch.

Choosing Which Of the Value Disciplines Is Best

Michael Treacy and Fred Wiersema argue that for a business to be successful, it must choose which of the three value disciplines – operational excellence, customer intimacy or product leadership – it must follow.

This is a multi-dimensional decision since it combines:

• Who the customer should target as its customers – price and convenience buyers, relationship buyers, innovation seekers.
• How to compete.

This makes sense and although it seems obvious when presented here, you may be able to think of examples where there is a mismatch which leads to confused customers and broken promises.

It’s not done intentionally but is often a reaction to competitive pressures. If a competitor appears to be getting an advantage from following a particular strategy, it is tempting to copy aspects of it rather than improving the way the business implements its own chosen value discipline.

I think this is a difficult choice because of the need to maintain some kind of proximity on all three of the value disciplines. Yes you will lead with one which you want to excel but you need competence in all three. I discussed this in The Experience Curve & Innovation.

Do You Find The Value Disciplines Approach Helpful?

I’d appreciate your thoughts on whether the value disciplines approach to business strategy and differentiation in particular is helpful so please leave me a comment.

Have they added to your understanding of the generic strategies created by Michael Porter?

I’ve written before about the importance of the experience curve for cost management and the importance to manage it actively rather than hoping that more experience automatically leads to lower costs.

The Impact Of The Experience Curve On Innovation & Differentiation

I’ve never discussed its impact on differentiation and how focusing on getting the most benefits from the experience curve can undermine customer facing innovation.

Process innovation lies at the heart of the experience curve. As you or your team do something repeatedly, then you find better or quicker ways to do it and especially if it is a task that you know will be repeated many times.

The first task is to standardise processes so that as much variation in outputs from the system are eliminated as possible and then, once the process is in control, you improve it.

The logic is impeccable and your costs should reduce.

Standardising Outputs Kills Customer Facing Innovation

But standardising outputs (either products or services) so that you can standardise processes kills customer facing innovation.

If you’re following a low cost reduction strategy using the experience curve, you don’t want to hear

“John I’ve got an idea. I think our customers would love it if we just…”

This is a conflict between getting costs lower and pleasing the customer and shows why Michael Porter was right when he warned of the dangers of getting stuck in the middle – caught between a low cost strategy and a differentiation strategy.

What Should You Do About The Experience Curve?

I certainly don’t think you should ignore it. The cost benefits are much too important to leave to chance.

The Experience Curve And A Low Cost Strategy

A business following a low cost strategy must use the experience curve rigorously and set clear targets for efficiency improvements and cost reduction. The aim remains to produce a good enough product and sell it for a low price. Differentiated niche players will bring out improved products and services will either move along the value curve or even shift it. The competitive response of a low cost competitor who has exploited the experience curve effects is to reduce prices. Yes you have to give up some of your hard fought margins but this is the nature of competition.

The Experience Curve And Differentiation Strategy

I also believe that a business following a differentiation strategy needs to pay attention to managing for  the experience curve cost savings and in particular standardising systems and processes so that important customer benefits are delivered consistently and reliably.

But the differentiator needs to actively manage the trade-off between keeping an eye on costs and either losing a differentiation advantage it already has or letting a competitor create a new key success factor which has the potential to transform the market.

Sometimes it will be better to make small, frequent, incremental changes which put the experience curve back to stage 1. Other times it will better to harvest cost savings for a while and then take a bigger, step change in product or service functionality.

It’s hard to generalise for differentiators because it depends on what competitors are doing, how customer needs are changing, the change in the product or service and the ability of the business to manage change and speed down the early stages of the experience curve.

Using The Value Disciplines As A Guide To Innovation

Michael Treacy and Fred Wiersema’s ideas on value disciplines are useful to fall back on when thinking about balancing innovation and the experience curve.

If you’re following an Operation Excellence strategy, the idea is to provide reliable products at a competitive price. You’re going to want to concentrate on extracting a lot of benefits from the experience curve and when you do change products, you’ll hope that your process excellence will give you a cost advantage provided you’re drawing on well established capabilities.

If you’re following a Customer Intimacy strategy, then your focus is very much on how much of an impact any innovation in product or service can have on customers. You’ll already have developed skills at customising products and services to meet the specific needs of particular customers. If customer benefits are high, then you’re likely to change quickly.

If you’re following a Product Leadership strategy, then the temptation to keep changing will be high because the reputation of the business relies on having products that are hot, preferably red hot. However there is a trade-off since you may be prepared to put off small incremental changes to make bigger “next generation” leaps that create so much publicity. Apple is a very good example of a Product leader business.

The Experience Curve & Innovation

Strategy is about making the right call on the big decisions. Sometimes it’s not easy which is why the rewards of getting the decision right are so big and why many companies find themselves stuck in the middle.

My purpose is to help you make the conscious decision.

Although my main interest is on differentiation to create unique customer value, you can’t shy away from managing costs professionally. The experience curve must not be ignored.

I hate airlines.

I hate that you are supposed to be at the airport two or three hours before the flight.

I hate the long check-in queues.

I hate the baggage rules, and I hate that other people seem to get away with flouting them and I don’t.

I hate the security process which is so incredibly slow and makes me take off my coat, my shoes, my belt, spill my change and keys on the floor and still the alarm goes off so I have to be individually searched.

I hate the fact that when I get into the departure lounge I can’t sit down.

I hate the fact that my boarding gate is closer to my destination than where I started.

I hate that the plane is late to board and even later to take-off because of the French air traffic control strike.

I hate that my seat is built for a midget and I have to squeeze in and sit all scrunched up and then the jerk in front insists on reclining his seat as soon as the flight is underway.

I hate the plastic food that is served up and the miniature bag of peanuts that I can’t get in.

I hate that I get knocked (because I’m in the aisle seat) whenever anyone walks past.

I hate that if I do nod off, it’s duty free time when I don’t want the stuff.

I hate how long it takes to get off the plane because they won’t open both doors.

I hate the long queue through passport control.

I hate standing at the carousel seeing everyone else get their bags, wondering where mine have got to.

I hate being rammed by some old biddy who can’t drive her bag on wheels.

I’m certainly not a satisfied customer of the airline. My expectations are low but each time I keep thinking that there must be a better way.

But I still fly.

And this is the big difference between the idea of customer value and customer satisfaction.

You can have an experience which leaves you very satisfied but you don’t want to do it again.

And you can have an experience, like flying, which isn’t satisfactory but you’ll buy again and again.

That’s because flying has some big advantages.

First, if you’re flying off on holiday, you have two days of pain but it sandwiches seven, ten or fourteen days of pleasure, fun and relaxation which can provide memories which will last a lifetime.

Second, flying is better than the other methods of travel.

I love South Africa and hate the ten or eleven hour flight but I don’t have time for the two week cruise just to get there.

I love Italy and the two hour flight from the UK is a breeze compared to the pain of driving down to Folkstone, going through the Tunnel, having to drive across France and then brave the crazy Italian drivers only to find that there’s nowhere I’m brave enough to park when I get there (there’s a reason why many Italian cars are small and dented).

There are a lot of advantages in flying which make it the obvious way to travel.

The experience sucks but I have to admit that the airlines provide me with customer value and that’s why I buy.

You may see me on your next flight.

I’m the big chap looking grumpy near the screaming baby.

Critical Success Factors (CSF) are unique to implementing your particular strategy.

Key success factors will be common across many of the businesses within an industry and (hopefully) each business has identified a few key factors of difference to differentiate itself away from the  competition.

The combination of key success factors and key factors of difference you need to focus on to deliver your strategy become your critical success factors.

Critical Success Factors Are Individually Necessary & Together Sufficient

These CSF are the factors which are individually necessary and together sufficient for your business to succeed in its mission.

There are normally about seven critical success factors for a business. If you identify more than ten, you need to go back and have a look at what you’re trying to do and test each success factor to see if it is really critical.

The reason is simple.

The critical success factors become the guide to managing your business and assessing your daily decisions and actions. You can remember five to seven success factors and check that actions that improve one won’t have an unnecessarily detrimental effect on another.

The Problem Of Having Too Many Critical Success Factors

But trying to juggle thirteen or fourteen success factors makes the process too mentally demanding.

You lose focus when the entire purpose of identifying success factors is to create focus on the few things that really make a difference.

Your business becomes complicated and confusing when the intention is to make success simple to understand and simpler to do.

Communicating Your Critical Success Factors With Key Performance Indicators

I sometimes talk to business owners and directors who have a problem with communicating their critical success factors with their staff and suppliers. It seems that there is this idea that having done all the hard work, thinking and analysis, your strategy should be kept secret.

Bits of it should be but not your critical success factors. Your staff need to understand the important elements that really matter and the success factors should be converted into performance measures and targets.

Performance measurement systems are important for monitoring how well the business is achieving its critical success factors and the Balanced Scorecard is the best well known technique.

Your customers need to be told about your key differentiation factors and they need to experience for themselves that the words turn into consistent performance, benefits and experience. And if your customers can see your differentiation factors, then so can competitors.

There’s a big temptation to make business strategy and strategic planning too complicated to be successful. This is why the idea of focusing on your key success factors (KFS) and your key factors of difference (KFD) is so important.

There are so many things that you could do to make your business more successful. There are plenty of experts promoting their methods as the one you must master if you’re going to achieve your big goals.

There is a problem. Following too many ideas can confuse and distract you when you need focus on the things that really matter.

That’s why the concepts of key success factors and factors of difference are vital to understand and use effectively.

First some definitions:

Definitions of Key Success Factors & Factors Of Difference

A key success factor for a trade, profession or industry is something that a business must do to be successful. It is a necessary condition for success.

A key factor of difference is a dimension of performance which influences customers in their choice of supplier and a criteria you have chosen to emphasise in a) your marketing and b) your business design, processes and personnel.

Critical success factors are a unique combination of industry key success factors and particular key factors of difference which together summarise the strategic plan of the business to achieve its mission.

Contrasting Key Success Factors & Factors of Difference

To contrast these two, KSFs are performance dimensions that you’d expect any successful business in an industry to perform well, the KFD are performance dimensions that make individual successful businesses in an industry unique and distinct from each other.

Key success factors can be internal or external factors in the business. Cost competitiveness may be a key success factor in a mature business. Key factors of difference focus on extra factors that add value to the customer.

Both may be used to differentiate one business from its competitors.

On the KSF, think good, better, best.

Everyone is good but it is possible to win customer preference by being better. You can aspire to be the best in a particular purchase criteria.

Key success factors can be order winners and order qualifiers.

The Difference Between Order Winners & Qualifiers

Order winners provide reasons why customers should choose your business, product or service.

In contrast, failure to meet the minimum standards on order qualifiers provide reasons why customers will reject or ignore your business, product or service.

I don’t like airlines (see Airlines Suck But We Still Fly) but you can see the contrast in order qualifiers and order winners as key success factors clearly. (For more information about the difference between order winners and qualifiers please read my article called Order Winners & Qualifiers)

Order Winners & Qualifiers Example 1 – The Airline Industry

A good safety record for an airline is a qualifying key success factor.

I don’t care how cheap a flight is, if there is a significant risk that it will crash, I don’t want to fly and nor do you. Some things are just too important to save a little money.

A high on time take-off and landing record is an order winning key success factor.

We don’t fly because we want to fly, we fly because it’s the best way of getting from point A to point B quickly. Waiting around for hours in an airport or being stuck on the plane sitting on the tarmac isn’t part of the deal I want.

Order Winners & Qualifiers Example 2 – Hotels

In another example, I recently wrote about differentiating hotels. Here cleanliness is a qualifying key success factor. The room is clean enough or it’s not. And if it’s not, then I don’t want to stay there but if I don’t have any choice, then I’ll complain until it’s fixed.

A great breakfast is an order winning key success factor. I haven’t reached a level of delight yet where I think it just can’t get any better although I have had some super breakfasts and especially in South Africa.

The Fit Between Key Success Factors & Key Factors Of Difference

So where do the key factors of difference fit in if you can differentiate your business with key success factors?

The key factors of difference create uniqueness.

They are order winner performance criteria which competitors don’t offer or don’t offer in the combination that you do.

They are optional extras that you choose to deliver to make your business stand out.

I must be hungry but returning to the breakfast theme, then every safari I’ve been on has sundowners out in the bush when you have a drink and perhaps a few nibbles as you watch the sun go down before you drive back to camp looking out for the nocturnal animals.

Only one has ever given me a proper full breakfast in the bush. It was great. An experience I’ll remember for the rest of my life although I did worry about whether a leopard might fancy my bacon, sausage, tomato, eggs etc.

Following the safari theme as a way to give you examples of KFD, another camp had a resident academic elephant researcher to study the large elephant population. We had the chance to go out with her one morning. It was terrific to hear about the family stories and how she could tell one huge elephant from another. This, together with other specialist researchers for animals was one of this safari lodge’s  key factor of difference.

Key success factors and key factors of difference are similar concepts which help focus the business and its management and staff on what it must do well.

Industry Key Success Factors Can Be Taken For Granted

Sometimes key factors of success get taken for granted. That becomes a weakness for firms in the industry, an opportunity for any company looking at the industry as a new entrant.

Industries think “we have to do X, Y and Z because we’ve always done X, Y and Z.”

But it may not be true.

Market changes happen in terms of what customers want and expect and what technology can deliver which render traditional key success factors obsolete.

How A Blue Ocean Strategy May Change Your Focus

A very popular book on strategy called Blue Ocean Strategy specifically looks at innovation to create new market space which isn’t being contested by competitors. This includes six different pathways to find new solutions to existing problems.

One of the main techniques is to map out the key success factors from the customer’s perspective on a strategy canvas to highlight areas of similarity and difference.

Industry Success Factors Can Be Broken By A New Business Model

A new business model can be created which delivers a very strong competitive advantage because it breaks one of the traditional key success factors.

In banking, having a wide brand network used to be a key success factor and it still is for some customer groups. But First Direct challenged this idea with the development of telephone banking and it’s been pushed much further with Internet banking.

The infrastructure to operate a bank is still a huge investment to get the IT systems, people and processes established (these are still key success factors) but it’s a much lower cost than the brand network with a physical branch on every High Street.

Another example is Amazon.

To sell books, CDs and DVDs on a large scale to retail customers, you used to need plenty of stores with location choice as a main key success factor. Now Amazon don’t care about store locations but do need an accurate picking and packing system and prompt distribution.

Key Success Factors & Increasing Profit

The purpose of strategic management is to review and then help to find better ways to achieve its goals which for a business is usually an increase in long term profitability.

My six step profit formula fits in well with the success factor thinking since every step can provide one or more critical performance indicators. Some businesses will put more emphasis on particular steps than others.

Have You Used Success Factor Analysis?

I’m very interested to hear stories of how you’ve used success factors to help guide your business towards its mission and vision.

A key success factor (KSF) for a trade, profession or industry is something that a business must do to be successful. It is a necessary condition for success.

The Difference Between Key Success Factors, Key Factors Of Difference & Critical Success Factors

There are a number of similar sounding phrases that mean different things. To help understand key success factors, you also need to understand:

Key Factors Of Difference (KFD) – performance dimensions that make individual successful businesses in an industry unique and distinct from each other.

Critical Success Factors (CSF) – performance factors which are individually necessary and together sufficient for your business to succeed in its defined mission.

To summarise in less formal terms:

Key Success Factors are common across firms within a product-market or industry.

Key Factors Of Difference are the factors a particular business chooses to differentiate itself on.

Critical Success Factors are the essential elements of a strategy for success in a particular business in a particular industry at a particular time. Your CSFs should vary every time you make significant changes to your strategic plan and the emphasis may change with minor tweaks in strategy.

Success Factors And The Value Chain

As you think through the factors for success in your particular industry and business, it is recommended that you look at both:

• The value chain for your business – all the interlocking processes you use to create value for your immediate customers.
• The industry value chain – how the entire industry from the start of the supply chain to the end create value for the final customer.

The ideal position for any business is the ability to create a product or service for the lowest quality in the quickest time and for the best quality.

This ideal isn’t possible but it’s a useful “perfect product” to keep in mind when thinking about product innovation and process innovation.

Where are the big differences in cost, time taken and quality arising? Do particular processes or steps create trade-offs in these three main areas of performance.

Success Factors & Your SWOT Analysis

When you put together your SWOT Analysis, your strengths hopefully include your key success factors or you have opportunities to develop the extra strengths you need for success.

It would be simple if key success factors stayed constant over a long period of time to allow the business to build superior skills in the vital areas but key success factors change.

Factors That Will Change Key Success Factors

Key success factors can change through:

• Moving through the product life cycle – in the early stages of a product life, design and marketing may be vital but as the market matures, emphasis switching to low cost, efficient operations.
• Changes in customer needs, wants and priorities – purchase criteria that were important may be replaced by new criteria
• Changes in PEST factors – technology changes in particular

If you ignore the idea that Key Success Factors evolve over time, you are likely to find that your strategy makes you less and less competitive.

Your Strategic Plan

Your strategic plan will bring together what you intend to do on:

1. The industry key factors for success as they are now and as you expect them to develop in the future
2. The particular key factors of difference that you believe you can use to create unique customer value to create a competitive advantage.

At this stage, they become critical success factors and need to be backed up with key performance indicators so that you can track performance.

Harvard professor and world famous business strategist Michael Porter has a simple view to business and how you can generate superior returns from your business – the generic strategies –  but you can get stuck in the middle, not one thing or the other.

These ideas were introduced in the book Competitive Strategy by Michael Porter.

The Keys To Successful Competitive Strategy

Either:

1. Work in a business which is an attractive industry – this is a business that is well positioned against the five competitive forces that Porter identified (threat of new entrants, threat of substitutes, buyer power, supplier power and intensity of competition).
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2. Have a competitive advantage.

Michael Porter & The Generic Strategies

And when it comes to competitive advantage, Porter was equally simple because your competitive advantage can either be:

1. From being the lowest cost operator supplier acceptable goods and services at a reasonable price (and having the ability to beat anyone else on price if necessary)
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2. From winning buyer preferences based on providing a product or service which is differentiated.

Those two cost advantages can either be applied to the broad market or to narrow focused or niched markets.

The Danger Of Being Stuck In The Middle

Unfortunately many businesses fall into the trap of being “stuck in the middle” of the generic strategies of differentiation and cost leadership.

They don’t offer the high value for money and distinctive product or service that you get from a differentiated business.

And they don’t offer the low prices that can come from buying from the cost leader.

It happens because the business managers don’t know that they have to choose or think that they can be both.

Effectively being stuck in the middle comes from trying to compromise and it creates a muddle.

A muddle for your customers who don’t really know what you stand for or what to expect from you.

And a muddle for your employee who don’t understand the priorities of their work performance.

Other Stuck In The Middle Concepts

Stuck in the middle in this strategic context does not mean:

• Being in the middle of a value chain from raw material supplier at one end to end user of final product at the other. It can be uncomfortable being squeezed by big suppliers and big buyers but that’s even more reason to follow a cost leadership or differentiation strategy.
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• Nor does it mean being stuck in mid market between the premium priced luxury products and the low-priced economy brands although that can also be uncomfortable if it’s not clear what your business stands for. This mid market position is sometimes combined with Porter’s stuck in the middle concept but it is a big simplification of what he’s trying to say. There is no reason why a business can’t have a very distinct and differentiated product offering and charge mid market prices for example in cars, think of the Mazda MX5 sports car.

How A Business Gets Stuck In The Middle

A stuck in the middle position happens when a business designed to be low cost starts adding little extra frills which don’t add a corresponding amount to the customer value of a product.

The business suffers the cost, the customer doesn’t get the benefit.

Or when a differentiated business comes under pressure on prices – perhaps there has been a market disruption from new technology or an ultra low-priced competitor from overseas – and starts cutting costs in areas which damage the differentiation advantage.

What To Do If Your Business Is Stuck In the Middle

If you think that your business is stuck in the middle – or heading in that direction – then you need to get to grips with your business strategy.

You need to decide what your business is and isn’t.

You need to decide who your business will sell to and who it won’t.

You need to decide what your business will sell and what it won’t.

Strategy is about making wise choices and then having the courage and conviction to follow through and commit to turning words and ideas into action.

The Role Of The Value Chain In Creating Competitive Advantage

In his follow-up book, Competitive Advantage, Michael Porter introduced the concept of value chain analysis to help you to analyse, understand and create competitive advantage so that a business isn’t stuck in the middle.

The value chain is an important technique which helps you to focus on advantage based on differentiation or cost leadership.