Lie Number Two: “We are a commodity industry”

You might argue that some industries really are commodity industries if they sell sand, iron ore or oil. I would argue that any business that succeeds for any period of time is surely differentiating itself in ways that are valued by its customers and therefore even if their products are highly commoditized their product offer is not.

I have heard people in many different industries say “we are a commodity industry”. Very early in my career I worked as an export sales manager for a small Swedish company that manufactured welding wire (basically just steel wire for those who don’t know). In that job I could argue for hours about why our product was better that the competitors and worth a small but very important premium. A great many customers paid that premium in order to improve the quality of their own products and manufacturing processes.

Some years later I spent 10 years with Whirlpool, the American whitegoods company, in various marketing and sales positions and let me tell you that people in that industry work very hard to differentiate their products. I don’t know how many times I’ve heard people say that a refrigerator is a refrigerator but the reality is that there is a great variety of appliances on the market and it is not the case that it is only the cheapest ones that sell. Even within what might be called a low-price segment competitors strive to differentiate their products.

Today, it is not uncommon to hear people talking about the commoditization of the telecom industry. On the surface it may appear that everyone is offering more or less the same thing: “A phone call is a phone call!” but nothing could be farther from the truth!

The other day I was talking to someone on the telephone. I was at my office but he was driving through the Swedish countryside in his car. He had a very bad connection and several times the call got cut off and he had to call me again. Finally, I asked him if he was a customer of my company (TeliaSonera). He admitted that he was not. He had recently switched from us to another operator because they offered him a slightly cheaper price-plan. My reply to him was that their price plan still seemed to be very expensive since their phone service was so poor. He laughed and we continued our conversation. A few days later he called and told me that he had changed back to my company. He had been thinking about what I had said and come to the realization that for a small difference in price he received much better quality of service from us. He said “I want to have a cell-phone so that I can make calls wherever I am and if it doesn’t work when I need it to I might as well not have one.” (In reality he probably paid more to the other operator with a poorer network since many price plans are more expensive to open a new call than to continue and old one.)

My point is that although many people talk about their business as if it were a commodity there are very few industries that truly are commodity industries. If you think you are working in a true “commodity industry” ask yourself why your company stays in business? What is your company’s competitive advantage? I think you will discover that although there may be great similarity between the products and services you and your competitors sell the actual offering you make to your customers may vary greatly. Your company may be perceived as being more reliable, giving better service or maybe just more likeable than your competitors. Whatever the differentiators are they are valuable and must be developed and managed. Customers don’t buy products they buy an offer that satisfies their needs. Even if your product truly is a commodity your offer to the customer which includes the commodity may very well be unique.

Lie Number One: Price Erosion

Inspired by Guy Kawasaki’s talent for identifying the “untruths” of the business world I thought I would try my hand at a few. The first on is the illusion of price erosion.

Prices do not erode! What erodes is a company’s ability to be more successful than their competitors at satisfying customers. So called price erosion doesn’t happen to individual companies, it happens to entire industries. When an industry experiences price erosion it is really an expression of the fact the players in the industry are achieving less and less diversification between themselves. When everyone offers what appear to be more or less the same products and services prices fall. Price erosion is only a symptom or evidence of the lack of innovation within an industry. Managers will sometimes justify lower revenue and weaker margins by proclaiming that they are victims of price erosion. You never hear them say prices are down to due their lack of ability to outpace their competitors!

Continuous improvement in value creation is hard. Lowering prices is easy! Most companies find themselves in situations where they are compelled to lower prices in order to maintain their customer base from time to time. Short-term profit margins can be maintained by reducing costs but long-term, the only way to earn more money is by creating more value for your customers. At some point in time you will reach a level of efficiency where cost reductions erode the value of the customer offer and only lead to further price reductions without additional margin. Many companies discover that although their margins are the same as a percentage they have declined drastically in real money.

If you feel compelled to talk about price erosion, make sure you keep in mind that it is only a symptom. If putting a label on the symptom helps you better understand the illness then power to you but don’t neglect the reality that your prices are eroding because your business is losing its competitive edge.

Born to Lead or Bats in the Belfry

Some years ago I joined the management team of a new division that had been created in the company I worked in at that time. The head of that division gathered his new management team for our first off-site meeting so that we could "team build". Our new boss opened this meeting by saying that he had hand picked each one of us because during our working lives we had developed into good leaders. He then continued by saying that he had be born to be a leader. He explained how it had been apparent to everyone as a child on the school playground that he was a born leader. We listened to a number of stories from throughout his life that exemplified his exceptional leadership. We were to understand that although we were all good leaders, he was a "born" leader (apparently in his mind equal to "great" leader").

I won't comment on whether or not my old boss was born with, or ever developed any leadership qualities. One thing he did, however, seem to have been born without was good common sense. This weakness seems to afflict many top managers and politicians. I am never really surprised that people get crazy thoughts in their heads. I know I often have absolutely ridiculous nonsense gallivanting around the corridors of my mind. What surprises me is that many people lack the judgment to keep these absurd notions for themselves! If my boss really believed he was the greatest thing to happen to leadership since Napoleon you would have thought he would also have realized that this revelation would sound a bit farfetched for his employees who were only moderately gifted.

This blog entry skirts the issue of whether or not leaders are born or created. It is highly likely that some people may be born with more of certain qualities that give them a head start at becoming a good leader but there seems to be very little agreement in management literature about what these qualities are. In fact about the only thing that everyone seems to agree on is that there are many different successful leadership styles. Another factor that seems to be common in all successful leadership styles is empathy. The ability to understand the wants and desires of others seems to be a success factor for all types of leaders including those who use their leadership solely for their own benefit and the oppression of others. Machiavellistic leaders as well as altruistic leaders have great advantage of a highly developed empathy.

The short of it is that no one really knows how great leaders are made. We know only slightly more about what traits are characteristic of great leaders. My suggestion is that if little voices in your head are telling you that you were born to lead, ignore them!

I Believe

Many years ago in College one of the assignments we were asked to do was to prepare a "Kleine Credo" or little belief system. The assignment was to write a short essay of no more than 1-2 pages describing our personal religious beliefs. It wasn’t a strange assignment since I was in a class on New Testament theology while working on a degree in Religion. ( I won’t bore you with the contents of that Kleine Credo.)

Many years later I was asked to speak to a group of employees who were going to be representing our company at a large trade show. The organizers asked me to talk about how to meet customers and give them good service. It occurred to me that it might help to remind these colleagues of just how important the work we do at our company really is and I decided to write a new Kleine Credo expressing my own opinions about the Telecom industry. Since then I have shown this for groups of people in all industries. If you cannot see how your industry is contributing to making the world a better place my recommendation is to change industry! What do you believe?

I Believe...

I believe that global competition promotes world peace.

I believe the telecom industry contributes significantly to world trade creating better opportunities to improve the quality of life for people around the world.

I believe the telecom industry facilitates better communication and greater understanding between people around the world.

I believe that we are all important members of a large group of people from around the world who have decided to cooperate in order to create these values, to create better world!

Personify your product!

I was asked to speak to a group of marketing graduate students about how I used market research in my work as a product manager. As I recall I spent most of the lecture showing examples of various research we had done and how that research had helped us make necessary decisions. During this presentation two things popped out of my mouth which I had previously not thought about very much consciously prior to that day but which I have come to believe more and more strongly throughout my working life.

"A marketer should live the life of their product" or "embody their product", "personify their product"…something like that…

In highly competitive industries marketing decisions must often be made very quickly. There will not be time to do in depth analysis on every issue but a marketer who is immersed in their product and who understands the industry dynamics of their business will make the right intuitive decisions when the time comes.