Harvard’s #1 Strategy Guru: “The key decision to make your business excel”

Monday, December 3rd, 2012

Harvard’s #1 Strat­egy Guru: “The key deci­sion to make your busi­ness excel”

Mon­day, Octo­ber 29, 2012

by Dan Richards, Cli​entIn​sights​.ca

Com­pe­ti­tion has brought many once-dominant names to the brink of sur­vival– think Gen­eral Motors, Kodak, Sears and Xerox. There’s an impor­tant les­son here that advi­sors ignore at their peril.

“For your busi­ness to thrive, you shouldn’t com­pete to be the best. Rather, you should com­pete to be unique.”

That was the key mes­sage deliv­ered at a recent talk by Har­vard Busi­ness School’s Michael Porter. The author of 18 books on strat­egy and six-time win­ner of the award for best Har­vard Busi­ness Review arti­cle of the year, Porter is today’s undis­puted lead­ing voice on com­pet­i­tive strat­egy and positioning.

And he had an impor­tant mes­sage for finan­cial advisors.

The flaw with being the best

Porter began by address­ing the flaws with the goal of being the best, a notion pop­u­lar­ized by for­mer Gen­eral Elec­tric CEO Jack Welch, whose dic­tum was to exit any busi­ness in which GE couldn’t be num­ber one or two in mar­ket share.

Porter pre­sented a dif­fer­ent view. The notion that you have to be the best comes from the world of sports and war, where there is one win­ner. The prob­lem with that “win­ner take all” mind­set is that the field is lit­tered with the losers, with only one win­ner emerg­ing. The bat­tle to be the best also leads to a focus on oper­a­tional excel­lence, where busi­nesses strive to out-execute, doing the same things as their com­peti­tors, only better.

There are two big down­sides to this approach. First, given the grow­ing focus on indus­try “best prac­tices”, this can be a dif­fi­cult strat­egy to sus­tain over time. And sec­ond, focus on oper­a­tional effi­ciency alone can lead to a down­ward spi­ral of price com­pe­ti­tion as firms try to squeeze other entrants by cap­i­tal­iz­ing on their lower cost structure.

In Porter’s view, a bet­ter anal­ogy comes from the per­form­ing arts, where you can have many out­stand­ing enter­tain­ers and actors, each build­ing his or her own dis­tinct audi­ence. And by hav­ing mul­ti­ple per­form­ers thriv­ing, they expand the total audi­ence as a result.

And he pointed to retail­ing, where it’s pos­si­ble to have suc­cess­ful com­pa­nies as dif­fer­ent as Wal­mart and Costco on one hand and Tiffany’s and Coach on the other. The thing that suc­cess­ful retail­ers have in com­mon: They have homed in on a dis­tinct audience.

The prob­lem with IKEA

Porter used IKEA as an exam­ple, a com­pany on everyone’s list of retail suc­cess stories

But Porter hates IKEA – he hates the long drive to get to their stores, the huge park­ing lots, the unend­ing wind­ing trek inside the store with no abil­ity to cut it short, the lines to pay, the trek to get the fur­ni­ture home and then the has­sle of assem­bling it. If it was up to him, he would never set foot in IKEA again..

But when his daugh­ter was a uni­ver­sity stu­dent in Wash­ing­ton DC, she loved IKEA — when­ever he vis­ited her dur­ing his trips to Wash­ing­ton, she asked him to rent an SUV so that they could make an IKEA run for her apartment.

Porter’s point: IKEA isn’t con­cerned in the slight­est that he hates shop­ping there, because he’s not its tar­get con­sumer. What IKEA cares about is that it’s put together a unique value propo­si­tion that appeals intensely to his daugh­ter and her friends – because they’re the audi­ence it’s targeting.

“Are you Sears or are you Target?”

The advan­tages of hav­ing a nar­rowly tar­geted audi­ence are indis­putable. Think suc­cess­ful retail­ers: Unique niche play­ers are the first to come to mind — Apple Stores, H&M, Lul­ule­mon and Zara. Even within the realm of mass retail­ers, look at the suc­cess sto­ries of upscale entrants Bloom­ing­dales, Nord­strom, Tar­get and Neiman Mar­cus at one extreme and lower end retail­ers such as Win­ners and dol­lar store leader Dol­larama at the other. These each deliver a unique value propo­si­tion to a tar­geted audi­ence – and present a dra­matic con­trast to the strug­gles of Sears and JC Pen­ney in the U.S. and the Bay in Canada that cater to every­one and have strong appeal to no-one.

The prob­lem is that most advi­sors look much more like Sears than Tar­get — fail­ure to be unique is arguably the biggest thing hold­ing most advi­sors back. Indeed, when I ask advi­sors how they’d respond to a prospect’s ques­tion about what sets them apart, here are the most com­mon answers:

“com­mu­ni­ca­tion”

“ser­vice”

“our peo­ple”

“our focus on planning”

“putting clients first”

“a dis­ci­plined invest­ment approach”

“our con­ser­v­a­tive philosophy”

While all of these traits are impor­tant, the dif­fi­culty is that they fail to be dif­fer­en­ti­at­ing – if every­one uses the same words to describe how they work, nobody stands out.

What you do – or whom you do it for?

Note that all these answers focus on what advi­sors do rather than whom they do it for. Most advi­sors are gen­er­al­ists, deal­ing with busi­ness own­ers in the morn­ing, clients plan­ning retire­ment at lunch and retirees in the after­noon. That’s because this is how most advi­sors started in the busi­ness – try­ing to appeal to as broad a mar­ket as pos­si­ble and indis­crim­i­nately work­ing with any client who’d have them.

That may have made sense when advi­sors were start­ing out – but all too many advi­sors have failed to evolve, con­tin­u­ing to use the same approach as when they began. In fact today the pri­mary basis on which most suc­cess­ful advi­sors tar­get new clients is based on min­i­mum assets and price sen­si­tiv­ity, almost never by need. And by try­ing to serve every­one, advi­sors are unable to fine-tune their prac­tice to the spe­cific needs of any one unique group.

Three things hap­pen as a result:

1. Advi­sors fail to develop spe­cial­ized exper­tise and oper­a­tional effi­cien­cies that come from focus and that would allow them and their team to develop a unique, tar­geted value propo­si­tion in their marketplace.

2. Con­se­quently, they fail to serve any­one excep­tion­ally well – and end up with clear com­pet­i­tive differentiation

3. The out­come of which is that advi­sors strug­gle to charge a pre­mium price and are unable to build a strong rep­u­ta­tion and get word of mouth going for them, the most pow­er­ful form of mar­ket­ing there is.

Get­ting there from here

The chal­lenge with a focused, unique value propo­si­tion is that it entails mak­ing trade-offs; to serve one group excep­tion­ally well, you have to decide to de-emphasize other groups.

And Michael Porter pointed out that peo­ple resist mak­ing trade-offs: “Peo­ple hate to choose” he said “because in choos­ing, they focus on what they give up rather than on what they gain.”

Porter fin­ished by sum­ma­riz­ing the essence of suc­cess­ful strat­egy that results in supe­rior performance:

1. By nar­rowly defin­ing whom you work with and the needs you address, you can achieve com­pet­i­tive advan­tage within the group on which you’ve cho­sen to focus

2. As a result, you cre­ate supe­rior value for your tar­get customers

3. And you cap­ture some of that value for yourself

After Porter’s talk, I spoke to a Chairman’s Club pro­ducer at a bank owned firm who has a tra­di­tional gen­er­al­ist client base – but who espe­cially enjoys deal­ing with suc­cess­ful entre­pre­neurs and their mul­ti­ple hold­ing com­pa­nies as well as com­plex suc­ces­sion issues. That’s also where he feels that he pro­vides the clear­est, most con­crete value.

This advi­sor has no plans to aban­don the hard-won clients that cur­rently pay the bills. What he is look­ing at, how­ever, is a three year plan to shift the focus of the new clients he attracts to con­cen­trate on entre­pre­neurs. That deci­sion will shape the exper­tise he builds on his team, how he orga­nizes his prac­tice and where he focuses his net­work­ing efforts and mar­ket­ing investments.

You don’t get to hear Michael Porter every day – his talk was the keynote at an alumni day spon­sored by the MBA pro­gram at the Uni­ver­sity of Toronto, where I’ve taught for 20 years. Indeed, one of the other atten­dees told me he’d grad­u­ated from Har­vard Busi­ness School 15 years ago – and heard more from Porter in his 90 minute talk than he had in the entire two years doing his MBA.

The lim­ited oppor­tu­ni­ties to hear from today’s #1 thinker on strat­egy makes it all the more impor­tant that you pay seri­ous atten­tion to his mes­sage. If you’re frus­trated by the fail­ure of your busi­ness to excel, con­sider whether your prob­lem may be that you’ve fallen into the trap of putting too much focus on oper­a­tional effi­ciency and being the best — and whether you need to focus instead on being truly unique.

That’s the advice Michael Porter pro­vides to the large multi-national com­pa­nies that pay his mil­lion– dol­lar con­sult­ing fees – and chances are that’s the advice he’d give you as well.

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Tags: Analogy, Brink, Competitive Strategy, Dictum, Downward Spiral, Financial Advisors, General Electric, General Motors, Harvard Business Review, Harvard Business School, Losers, Michael Porter, Mindset, Operational Efficiency, Operational Excellence, Peril, Price Competition, Sears, Time Winner, World Of Sports
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Four new imperatives for effective client communication

Wednesday, November 16th, 2011

The invest­ment land­scape has altered fun­da­men­tally since last fall.

One of the impor­tant changes is a basic shift in what investors look for  in terms of com­mu­ni­ca­tion from their advisors.

In my Octo­ber col­umn in Invest­ment Exec­u­tive, I out­lined four new imper­a­tives for client com­mu­ni­ca­tion that advi­sors ignore at their peril.

Since last fall, I have talked to more than 500 investors in round-table focus groups and one-on-one inter­views about their response to the mar­ket downturn.

Some of the things that investors seek from their finan­cial advi­sors have stayed con­stant . Investors still look for advi­sors who lis­ten, demon­strate they care, put their clients’ needs first and pro­vide advice tai­lored to each investor’s needs  along with the abil­ity to rec­om­mend solu­tions that choose from the widest range of offerings.

At the same time, a fun­da­men­tal shift has occurred in some other things that investors look for from their finan­cial advi­sors – and four new imper­a­tives have emerged.

Imper­a­tive one: Demon­strate empathy

In many cases, the first pri­or­ity for finan­cial advi­sors is to estab­lish a bond of empa­thy and to tap into client feel­ings – often, clients are unable to lis­ten to their advi­sor until they first feel lis­tened to.

If an advi­sor hasn’t had an indepth con­ver­sa­tion about how a client feels, one of the bet­ter ways to start a meet­ing is to say some­thing like: “Many investors have lost sleep because of the mar­ket events last fall. Tell me, how have you been affected by the mar­ket over the past while?”

Imper­a­tive two: Pro­vide guid­ance and direc­tion… with an out­look of bal­anced optimism

While almost no one is happy with what’s hap­pened to their port­fo­lios in the past, most investors aren’t blam­ing their advi­sors for this – they see every­one they know in the same boat.

What is caus­ing dis­sat­is­fac­tion among many investors is what’s hap­pen­ing today.  Many clients say that their advi­sor is overly pas­sive and not pro­vid­ing direc­tion on what they should be doing going for­ward. Today, investors are look­ing for guid­ance on how to move for­ward – and if they don’t get it from their exist­ing advi­sor, they’ll look else­where. Even given the uncer­tainty of today’s envi­ron­ment, advi­sors need to sit down and talk to clients about the dif­fer­ent sce­nar­ios for the period ahead and the impli­ca­tions for their portfolios.

Imper­a­tive three: Incor­po­rate fresh perspectives

A com­mon com­plaint among investors is that their port­fo­lios are unchanged since the mar­ket melt­down began last fall – a com­ment I hear a lot is “If my port­fo­lio made sense then, given every­thing that’s changed, I don’t see how it can be right now.”

In cases where investors are in mutual funds or man­aged money, of course, their port­fo­lios have been actively man­aged – and it’s incum­bent on the advi­sor to help clients under­stand how their invest­ments have changed.

In other instances, it might make sense to intro­duce a new ele­ment into client port­fo­lios, such as invest­ment grade cor­po­rate bonds. Clearly, any rec­om­men­da­tion has to be appro­pri­ate and you never want to make change for the sake of change – but fail­ing to rec­om­mend appro­pri­ate changes runs the risk that clients will see their advi­sor as tak­ing them for granted.

Imper­a­tive four: Ramp up  communication

The final new imper­a­tive for advi­sors relates to the demand for communication.

The events of last fall have dra­mat­i­cally height­ened demand for fre­quency of con­tact  – what­ever level of con­tact clients wanted a year ago, it’s almost cer­tainly higher today.

And it’s not just demand for quan­tity that has increased – many investors are look­ing for more sub­stan­tive com­men­tary on prospects for the mar­ket and for their portfolio.

Many advi­sors can’t meet this demand sim­ply by increas­ing the num­ber of meet­ings and phone calls. New com­mu­ni­ca­tion vehi­cles need to be be used to sup­ple­ment the tra­di­tional per­sonal con­tact – email­ing arti­cles, con­fer­ence calls and group sand­wich lunches in a board­room to name just three.

The events of last fall have caused invest­ment man­agers to re-examine their prac­tices and adopt new approaches – in a sim­i­lar vein, to be effec­tive invest­ment advi­sors need to fun­da­men­tally rethink their approach to client com­mu­ni­ca­tion, bear­ing these four new imper­a­tives in mind.

To read the full arti­cle, look at the Octo­ber issue of Invest­ment Executive.

And to watch a video sum­ma­riz­ing these changes, click play on the fol­low­ing video:

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Tags: Array, Client Communication, Dissatisfaction, Empathy, Feelings, Financial Advisors, First Priority, Focus Groups, Fundamental Shift, Guidance, Hasn, Imperatives, Indepth Conversation, Investment Executive, Investment Landscape, Investors, Market Downturn, Offerings, Optimism, Peril, Portfolios
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