PROFIT Magazine: The Biggest Lie in Business

November 28, 2008 at 2:29 pm | Articles & Interviews

The trap never fails. Jaynie Smith invites the roomful of CEOs at her workshop on competitive advantage to write the answer to this question: “What’s the No. 1 reason I should do business with you rather than your competitors?” Then she asks those who wrote “Good customer service” to stand up. Next are those who wrote “quality,” then “reputation,” then “knowledgeable staff.” By now, half the CEOs are on their feet.

When Smith gets to the tenth advantage on her list, virtually every CEO is standing. They’re starting to look sheepish as the point of the exercise dawns on them: how can you claim a competitive advantage that’s the same as everyone else’s?

Smith, president of Smart Advantage Inc., a Fort Lauderdale, Fla.-based consultancy specializing in identifying and communicating competitive advantage, has set her trap more than 200 times for CEO groups and companies across North America. The outcome never varies. Almost every CEO writes down what she pointedly calls “blah blah blah” — claims so lacking in specifics that prospects tune them out. Just seven of the 3,000 chief executives she has spoken to in eadership round tables over the past four years have been able to articulate a meaningful point of differentiation, reports Smith, author of Creating Competitive Advantage. “They answer with clichés,” she says. “But if you don’t give a compelling reason why someone should do business with you, the tiebreaker falls to price. And we don’t want that.” These CEOs aren’t necessarily wrong to think that their firms have good customer service or knowledgeable staff. What they fail to see is that such fuzzy claims do nothing to make them stand out from the pack.

It’s probably true of your company, too. The biggest lie in business is the one you tell yourself: that you know and can clearly articulate why anyone should choose you over your competitors. Unless you’ve gone through a disciplined exercise to identify your true advantage, the odds are that you’re off base. You might be promoting a benefit that customers care little about, or that isn’t decisive in their buying decision. You might be promising something your firm doesn’t consistently deliver. Or you might be right about the general terrain on which you have an edge over your rivals, but you’re communicating it with empty clichés. (The others in Smith’s top 10 are good results, our employees, consistent management, responsiveness, innovativeness and trust.).

It’s far harder than it looks to state concisely how you’re better than your rivals, so it’s tempting to stick with a stale platitude and go back to running your business. Yet if your marketing materials don’t distinguish your product from that of your rivals, you’ll struggle to fill the sales funnel. If you don’t supply your salespeople with a meaningful answer to the question “Why should I buy from you?” they’ll be forced to compete on price. And if your existing clients aren’t crystal clear why they’re doing business with you, they could bail the minute they get a better offer.

On the other hand, if you’re one of the few firms to get this right, you’ll protect yourself from stiffening competition, sectoral slumps and, to the greatest degree possible, a full-blown recession. Should you decide to sell your firm down the road, you’ll fetch a better price from investors prepared to reward a business that’s laser-focused on its true advantage. Your staff will reward you, too, because working for an employer that knows what it delivers better than anyone else creates a sense of pride and excitement that energizes the entire organization.

The best news is that your rivals are probably hopeless at this task, leaving a market vacuum you can fill. Roger Hardy, president and CEO of Coastalcontacts.com, a Vancouver-based online seller of eyewear whose revenue climbed from $9 million in 2002 to $102 million in 2007, says if you get it right and your competitors don’t, “you become the gorilla, a company that gets a disproportionate share of the sales and, most importantly, the profits.”

Hardy, who has founded seven companies, admits he was “not great” at identifying the true differentiator at his previous firms, mostly Web-based businesses that competed on price. But without the economies of scale to consistently undercut his rivals, competing on price alone made him vulnerable to market downturns: “I was left without a chair when the music stopped.” Yet Hardy was so caught up in the price game he didn’t question his assumption that cost was all his clients cared about. “Back then, I was much less engaged with my customers,” he says. “When you’re having success, you think, ‘I must be doing what customers want.’”

Hardy got religion a few years ago about the need to cultivate advantages beyond price when he read Inside the Tornado, Geoffrey Moore’s book on surviving in hypergrowth markets. Price remains a key advantage for Coastal. But its true differentiator is continuous innovation to make it ever more convenient for customers. The company streamlined the ordering process so it takes four minutes or less to purchase a pair of lenses. It eliminated any perceived risk in buying from an unknown, virtual vendor by invoicing customers only after they had received and tried the lenses, rather than requiring payment up front. It took the worry out of waiting for product by using FedEx for next-day delivery. And it hammered home its advantage in convenience on its website, in a million e-mails per month to its customers, video ads on Facebook, and TV, newspaper and other advertising.

Hardy says Coastal never stops working to deepen its advantage. His managers take turns phoning 20 customers per week to chat about Coastal’s service. They routinely discuss competitive advantage at staff meetings. A sales team runs online experiments to gauge customer response to new ways to make it easier and faster to buy from Coastal. “We’ve spent the most time on identifying and constantly building a successful competitive advantage,” says Hardy. “That’s why this company has been the most successful and my other companies have been, at times, mediocre.”

There’s no definitive measure of the payback from determining your firm’s true advantage, but specialists in the field cite impressive figures. “My clients insist on getting at least $5 back for every $1 they spend on our process,” says Harish Chauhan, CEO of Business by Philosophy, a Toronto-based consultancy that helps firms develop a positioning statement of six words or less called a Unifying Philosophy (UPh). For the past three years, Chauhan has guaranteed that if the client’s own calculation shows its ROI hasn’t met this minimum, his team will work for free for three months until it does. It has never had to do so. Smith says she’s comfortable promising 20% to 40% higher close rates. She points to dramatic gains by such clients as the Visiting Nurse Association of Florida (VNA). Its nurses now act as sales reps, handing out laminated cards that articulate the organization’s differentiators, such as that VNA patients improve 34% faster than the U.S. average. This helped fuel a 40% sales jump within six months.

Why aren’t all companies beavering away at defining and articulating their unique value proposition? The biggest reason, says Smith, is that most firms don’t think they need to: “They believe, ‘We’re already successful, we’re doing fine, we already know our customers.’” Hardy says it can be tough to admit you’ve succeeded largely by floating on a rising tide — or maybe “you don’t know that you don’t know what your competitive advantage is until the tide starts to pull back out.” And many entrepreneurs mistakenly believe you can pull a competitive advantage statement out of a hat.

Jeff Cullen, CEO of the North American division of Bellville Rodair International (BRI), says the company spent 18 months developing its current positioning statement (“Building Reliability”) and instilling it throughout its operations. (See “A promise you can keep,” page 33.) However, the Mississauga, Ont.-based freight forwarding and logistics provider had put far less thought into its previous value proposition. In search of something catchy, edgy and matching the initials in the company’s name, says Cullen, “we spent probably an hour and a half with a dictionary open when we came up with ‘Bold. Reliable. Innovative.’” In hindsight, Cullen admits, the statement lacked substance.

Still other companies think their marketing messages already convey their true advantage, not realizing that these have no connection with what the company was built to offer. Ian Chamandy and Ken Aber, partners in the Toronto-based consultancy Blueprint Business Architecture, help their clients strip away meaningless marketing verbiage — what Aber calls “veneer and shellac” — to find a relevant message in why their firms were founded. Chamandy says people launch businesses because they want to fix things that are being done badly or not at all. Blueprint searches for this reason to help it craft an Inspiring Proposition (IP), a positioning statement of seven or fewer words. “Every company is started to be a cause,” says Chamandy. “It happens to be a commercial cause, but it’s a cause nonetheless.” Uncover that cause, and you can inspire people to buy from you rather than having to convince them. Equally important, you can align your staff with that cause.

There’s another reason many businesses avoid the whole subject of their true advantage: they fear they have nothing distinctive to offer. Indeed, many of Smith’s clients insist they’re commodity players without any real advantages. “If you get your eyes off the darn product or service, you’ll see that you’re not a commodity,” she explains. “Your product is a commodity, but how you deliver it is not.” She says most advantages stem from things that clients value above and beyond the product or service. Unlike your rivals, you might offer free installation, more flexible credit terms or more convenient delivery times. Smart Advantage’s list of potential “deliverables” tops 1,500, and Smith says every firm has an edge in at least some of them.

Admitting you don’t know your firm’s true advantage is a big step. Next comes an even bigger one: figuring out what it is.

If you’re lucky, your customers will point you in the right direction. That happened to VRX Studios, which provides visual content for travel and hotel websites, such as photos of hotel facilities. David MacLaren, president and CEO of the Vancouver-based firm, says he initially thought VRX’s competitive advantage was merely its product — virtual tours of destinations licensed to travel sites — because no one else sold them at the time. But when three hotel operators separately asked VRX to shoot images of their properties, he had his epiphany: VRX’s true advantage wasn’t its product but its production process. A well-oiled team operating 365 days a year shoots thousands of images, and a post-production assembly line uses advanced imaging software to ensure superb quality regardless of lighting conditions. With its superior organization, VRX can, for example, move fast to reshoot images that need updating because facilities have been renovated.

Yet MacLaren was loath to capitalize on his true advantage, because margins for photography were 30%, versus 80% for virtual tours. “I thought, ‘Nah, I don’t really want to do it,” he recalls. But with his firm running out of cash and his sector in recession, he had little choice but to give the new market a try. That move yielded this second insight: his highly scalable production process allowed him to generate 10 times as much revenue as he could in his original niche. That’s partly because hotels renovate frequently and hate having stale visuals on their websites, requiring 20% of images to be replaced annually.

Since identifying its true advantage, VRX has built its business around enhancing it. In 2006, it launched a guarantee that no rival has the production process to match: to reshoot within 30 days any images needing an update. It began date-stamping its images as part of its “Always Fresh” brand positioning. MacLaren says this was a key to landing big accounts such as Best Western International and Fairmont Hotels and Resorts. Reinventing the business also saved it. While demand has exploded for hotel images, it has stagnated for virtual tours. “If I had stuck with just that, we wouldn’t be alive,” says MacLaren. “In hindsight, expanding into hotel work was the best decision, but at the time it was a reluctant decision.”

If you’re not as lucky as VRX, you’ll need a system for pinpointing your true advantage. For a few tens of thousands of dollars, you can bring in a competitive-advantage specialist to lead brainstorming sessions, resolve conflicts and keep pressing until you reach your aha! moment. But first you’ll need to ask three questions about the approach you wish to take. The first is about the number and scope of the competitive-advantage statements you’ll make. Would you rather present several tactical benefit statements, replacing them as necessary as your customers’ preferences and rivals’ offerings shift? Or would you prefer to sum up your overall promise to customers in a single statement designed for indefinite use?

Smart Advantage takes the first tack. Its clients typically take to market three to five statements highlighting particular attributes of their competitive advantage. Most have numbers attached, such as “Our engineers have a minimum of 15 years of experience, twice that of our nearest competitor.” Statements like this stand out in a sea of “blah blah blah” by stating or strongly implying reasons to buy from you. Still, they have a finite lifespan. Smith says you need to keep identifying new advantages as rivals copy your existing ones. She advises SMEs to devote one day per quarter discussing the state of their advantages and spend $8,000 to $10,000 per year on market research that tests which statements currently resonate with customers and prospects.

Some consultants take the second approach, working toward a snappy positioning statement with no expiry date. Chauhan says his unifying philosophies — which are tightly written to allow customers and staff to grasp your firm’s mission easily — crystallize your company’s DNA. BMW has built billions in equity by maintaining its positioning as “The Ultimate Driving Experience” for more than 30 years while continuously evolving how it executes on that. “What was ultimate 10 years ago is not what will be ultimate 20 years from now,” says Chauhan. “But the statement stays the same.”

The second question you must ask is who determines where your true advantage lies. Can your customers tell you, or do only you know?

It appears to be a point of contention among competitive-advantage specialists. “Your customers’ perspective is the only one that matters,” says Smith flatly. Her process starts internally, with clients brainstorming 50 to 100 potential attributes of competitive advantage. Next, they cull this long list to 20. Then a market-research firm calls a mix of customers and prospects to ask them to score each attribute on how much it matters in their purchasing decision. Companies take to market the attributes scoring in the top three to five.

Smith says no client of hers has ever guessed right on the top three. That happened again this June, when Smart Advantage worked with Calgary-based Trican Well Services Ltd., which helps oil and gas producers extract more from their wells. Dale Dusterhoft, Trican’s vice-president of technical services, says that although the company knew that its stock of equipment — the largest in the industry — allows it to respond faster to clients, it was surprised when customers ranked this benefit No. 1. Next came a high level of expertise of technical staff, which Trican expected. But it didn’t expect a high safety rating to crack the top three. “Customers don’t assume, as we thought they did, that every company has a good level of safety,” says Dusterhoft. Trican is now rolling out a marketing campaign highlighting these three attributes.

Other consultants reject asking your customers to reveal what they care about most. Chamandy says although what matters is what customers are buying, not what you’re selling, only you can figure out what will inspire them to buy from you. He asserts that you can’t use market research as a predictive tool, because “people don’t really know what they want. Most of the things that have come along that they have really glommed onto have not been things that they’ve requested. Before computers existed, nobody said, ‘I need a computer.’”

The third question you’ll need to ask is the nature of the statement you wish to make. Do you want to make specific claims related to several customer priorities, or stake out a broader benefit vital to them, such as “Building Reliability”?

Showroom Traffic Manager, which makes software that helps auto dealers boost close rates on showroom floors, opted for the former. Its COO, Judy Adler, admits that even after more than 20 years in business, the Toronto-based firm had no idea what its edge was in its market: “We had sales reps who went from dealership to dealership with a book full of the reports our software produces, and they tried to sell it that way. We’d say, ‘Hey, look at all our great reports!’”

Showroom worked with Michel Neray, president of The Essential Message, a Toronto-based competitive-advantage consultancy, to identify an edge Showroom could promote for a planned entry into the U.S. Neray’s sessions revealed that Showroom knew its software was raising its clients’ close rates but hadn’t documented it. Showroom gathered aggregated sales data from its clients, then persisted until it turned up comparable industry-wide figures. The payoff came with this punchy Essential Message: “Achieve close rates 1.5 to 2 times the national average. Or more.” It’s too soon to measure results, says Adler, “but this message has made a world of difference” in the reception to the U.S. sales push Showroom launched in July: “Even in the current economy, people want to talk to us and are seeking us out.”

Strictly speaking, even Showroom isn’t stating a competitive advantage. After all, it isn’t making an explicit comparison with anyone else. Still, you can get a lot of mileage from implicit benefit statements. If you can’t show where you beat your rivals head to head, advises Smith, speak of things you deliver that your rivals might also offer but haven’t bothered to market. If you state that you get 95% of your business from repeat clients and your rivals say nothing about this, the message is that you offer superior customer satisfaction. When BRI adopted “Building Reliability,” it knew no one else had occupied that space. And Chauhan says his client has done so much to drive this UPh throughout its day-to-day operations that a rival couldn’t credibly make a similar claim.

A solid if low-key benefit such as reliability was the right answer for BRI. But your firm might be able to make a more dramatic promise, even if you’re in a sector short on drama. That was true for Vaughan, Ont.-based Interiors Inc., a Blueprint client in the scintillating business of installing shelving for big retailers. With a lot of probing, Chamandy was able to tease out the fact that Interiors owned processes allowing it to install shelving significantly faster than its rivals could.

That gave Interiors president John Panigas an idea: why not change the “Opening Soon” signs on its jobsites to “Opening Sooner”? That became the firm’s Inspiring Proposition — one with a hard cash value to retailers. When a Home Depot client asked Panigas what the IP meant, Panigas explained and promised that if Home Depot would let him rewrite the specs for a store-remodelling project, Interiors could fully apply its superior processes to complete the job far sooner than the retailer expected. That led to $2 million in new business, a 40% jump in annual revenue.

Ironically, “Opening Sooner” opened so many doors for Iteriors that its growth rate outstripped its ability to finance it. After scaling up to handle the new volume of business, says Panigas, it ran into a cash-flow crunch during one of the dry patches common in a sector in which “you can work hell-bent for leather for a customer for six months, then have nothing for the other six months.” In July, his firm was forced to close its own doors. Still, its experience powerfully illustrates the difference a smart answer to the question “Why should we buy from you?” can make.