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Chapter 1
Introduction: the
competitive
advantage of
sales channels
What do these three companies have in common?
Dell Computer makes personal computers that are about the same as its competitorsā products. Aside from the various features provided at different price points, what difference is there, really, between a Hewlett-Packard, IBM, Dell, Gateway, or Compaq PC? Not much, other than an individual customer's preference for a particular brand.
Yet Dell has been the computer industry story for the last several years, with the press having a seemingly endless appetite for news on the company and its billionaire CEO, thirty-three year old Michael Dell. Why? Because Dell's growth is all out of proportion to its competitorsā market performance. Almost written off in 1993 after failing in its attempt to launch a laptop business, Dell has come roaring back. Over the past three years, sales have grown fifty-three per cent annually, from $3.4 billion to over $12.3 billion. During the same three years, profits grew eighty-nine per cent per year and Dell's worldwide PC market share doubled. The company's revenue growth is over twice that of any of its competitors1.
How did Dell do it? There's a complex answer, but basically Dell provides a wide range of attractive ways for people to buy their equipment. Customers can configure their own systems and order them over the Internet ā which they do, making over one million site visits per week and $4 million in purchases every day2. Customers can also buy through efficient call centres linked to Dell's build-to-order system, which eliminates distributors and takes seven per cent out of the cost out of each computer sold. These systems have given Dell significantly higher per-sale profitability as well as the ability to reach dispersed groups of customers in more numerous markets. Competitors, bogged down with expensive direct sales forces or inefficient networks of distributors, are struggling to figure out how to compete effectively against the Dell juggernaut.
Charles Schwab, the discount broker, has the most popular Internet brokerage site, with over 1,200,000 on-line accounts3. If you are not an on-line type, Schwab also offers round-the-clock call centres for trading, account information and market data. If you want face-to-face investment advice, Schwab has retail branches in most major cities. Schwab has also emerged in the last two years as a ā perhaps the ā key distributor of competitorsā financial products, selling, for example, mutual funds from Fidelity Investments. There is basically no known channel that Schwab doesn't provide to its customers, and no known brokerage product that Schwab doesn't sell through those channels.
The result of this hyperactivity has been stunning. In a hotly contested online brokerage market with dozens of low-cost competitors, Schwab has almost a forty per cent share of the entire on-line brokerage business4. The company's revenues are about three times that of its average competitor. Those competitors, who sell the exact same financial products, have been playing frenzied catch-up ball, starting their own web sites, improving their often dismal call centres, entering into partnering agreements to carry other firmsā products, and lowering transaction fees. In many cases Schwab's competitors have come up with lower costs, better Internet sites and more extensive services (such as stock picking advice). Schwab, though, loses few customers and is signing up more than two thousand new ones every day. Selling the same products as competitors, sometimes at higher prices, Schwab nevertheless enjoys a commanding position of market leadership. Why?
First Direct is in one of the toughest markets in the world, British retail banking. Deregulation has brought about a wild race among all sorts of companies to see who can become the ultimate one-stop shop for financial services. Banks that used to sell savings accounts and loans are now pitching investment, life insurance and pension products. Insurance companies and ābuilding societiesā (mortgage companies) are fighting back by selling savings and deposit accounts. Supermarkets have their own credit cards. Even the department store Marks & Spencer sells loans and pension products to its customers.
This massive cross-selling and competition has led to a wide-scale industry shake-out. Bank branch offices have declined from 21,000 to less than 15,000 over the past decade. Over ten per cent of the entire banking work force of 274,000 has had to find new jobs as more and more competitors move in on the turf of the retail banks. In the middle of this shake-out, First Direct, in business only eight years, has built a customer base of 760,000 and is adding over 15,000 new customers every month. Two-thirds of its new customers are defectors from the retail banks and building societies. Why the stampede?
Certainly not because of its products, which are the same as those offered by other banks. It's because the company lets customers do business the way they want to do business. Customers interact with First Direct over the phone, through the mail, and over the Internet, as well as through traditional retail branches and ATMs (available through parent Marine Midland Bank). Its telephone operators are available twenty-four hours a day, seven days a week, so customers are never without service. Its range of alternatives, from phones to ATMs to the mail service to the Internet, means that customers do not ever need to make the trip to the bank. In sharp contrast to its competitors, First Direct has a ninety-eight per cent customer retention rate. Having learned something important about customer buying behavior, it is currently adding PC banking and is even looking into television banking.
These successful companies, though in different industries, have at least two things in common.
First, they have all but dispensed with the idea of fighting on the battlefield of product features. They are leaving it to their competitors to tweak this or that gadget in the search for competitive advantage. In terms of what they actually sell, their products are about as good and often about the same as their competitorsā offerings. Products, though, are not where they are fighting for competitive advantage. They have all decisively looked elsewhere for competitive differentiation, and specifically on how they go to market with their products and services. These companies are achieving strong revenue and market share growth primarily by making it more attractive for more customers to do more business through more convenient sales channels. Put simply, they have all bet big ā and so far bet correctly ā that they can get more competitive advantage from how they sell than from what they sell.
Second, these are hugely successful companies, as measured in shareholder value and growth. Dell's stock price has increased 29,000 per cent since 1990, and its priceāearnings ratio of fifty-four, the premium paid by investors for anticipated future growth, is nearly twice that of the average company in the S&P 5005. Schwab's stock price has increased tenfold over the past five years. First Direct is one of the fastest growing banks in the United Kingdom, and is well on track to reach its target of 1,000,000 customers by the year 2000.
The dramatic successes of these āchannel-centricā companies in highly competitive markets raises an important question. For many years, product differentiation was where companies made their stand. Only recently, perhaps in the last ten or fifteen years, have leading companies begun to look toward channel differentiation as a key source of competitive advantage. The question is: what happened?
The challenge facing product-centric companies
For a business to be viable at all, it has to do something well. For it to win in a competitive market, though, it has to do something better than its competitors. This familiar idea, competitive advantage, says simply that you have to be better than your competitors, at something important to your customers, to make sales. That āsomethingā could involve better products, or lower prices, or better service, or whatever else matters to customers.
Short-term, modest competitive advantages are not difficult to find and exploit. A small rebate on a Ford Taurus will lead to increased sales; a better cup holder in a Honda Accord will steal some of those sales back6. Competitive advantage is constantly in flux as competitors vie back and forth on product features and price. Short-term, small competitive advantages, though, are not the answer for most companies, for the obvious reason that they don't last. The issue is finding and maintaining a sustainable competitive advantage: an advantage that has some staying power in a competitive market place.
It's when you think about sustainable competitive advantage that you realize what a fix many companies are in today. When Lotus Development Corporation came out with the Lotus 1-2-3 spreadsheet program in 1982, it had a huge and profitable market largely to itself for a few years. Today, Netscape Communications comes out with new Internet browser software and before you can say āI'll take one!ā Microsoft comes out with a similarly-featured version of its own browser. Millions of dollars in R&D yield fleeting moments of differentiation. Levi's had the denim jeans market to itself for half a century; today popular fashions and fabrics are copied in days and appear in retail stores almost instantly. Do you have a better pizza, video rental concept, or cellular phone to sell? You probably have a few months or less before Pizza Hut, Blockbuster or Nokia figure out what you did, replicate it (if it's a good idea) and get it to market quicker and probably more efficiently. Product competitive advantage isn't measured in years anymore; it's measured in months, or weeks, or sometimes days.
The forces behind this crunching of competitive lead time are well-known. Communication technologies have increased the speed at which companies can find out what competitors are doing and feed back new design concepts into their own product releases. Manufacturing technology has radically lowered the costs, and the barriers to entry, for getting into a market with a high-quality, market-ready product. Today's global corporations have the resources and economies of scale to scour the planet in search of every last customer, leaving perhaps a few desolate islands up for grabs. Advances in distribution and logistics systems have enabled companies to send products all over the world and get them into the hands of customers in a matter of days and, in some cases, hours.
Put all of this together, and you can see why companies are worried about whether a new and better gadget will result in any durable competitive advantage.
If not products, how about competing on lower costs?
For a while companies focused not on producing better products, but on improving business processes to reduce costs. The cost-cutting frenzy and then the reengineering ārevolutionā hit the business world like a ton of bricks in the late 1980s, leaving dazed managers with skeleton teams, reduced budgets ā and efficient, streamlined business processes. In retrospect, some of the excesses of the reengineering craze now seem a little out of hand, with companies trying to refocus on growth and re-motivate legions of disaffected, bitter employees. Nevertheless, in many organizations productivity increased, costs decreased, and stockholders became millionaires as margins soared.
So far so good. Today, though, many companies have reached parity in terms of cost-reduc...
