Saturday, May 2, 2009

Let us De-Commoditize Our Industries

By Olu Akanmu

Professor Michael Porter of the Harvard Business School was recently in Nigeria to speak to Nigeria CEOs at a BusinessDay CEO forum. One of the theme of his presentation was the need for CEOs to lead their business to deliver unique value proposition to their customers, to compete differently from rivals and understand the difference between Operational Excllence and Strategy, even in this recessionary economy. Quoting Porter, "the worst error in Strategy is to compete with rivals on the same dimensions". This article below, a lecture delivered at the Lagos Business School SMP 25 Alumni Re-Union in December 2006, gives a deeper Nigerian flavour to some of the theme of Professor Porter's lecture. Another article " Be Different or Die" also on this blog is also strongly recommended.

I congratulate you, the SMP Silver Class on your Re-union. It is important to always come together to strengthen our bonds of friendship, our shared values and our collective commitment to business excellence. Speaking to your President yesterday, I could see why you have been described as one of the most exciting groups in the LBS Alumni. You group is defined by its diversity, its passion and its balance mix of fun and business which you are demonstrating today.

As senior managers we are actively involved in debates that shape the destiny of our organizations. Our primary responsibility collectively as managers is to build sustained wealth of our shareholders. I like to speak to you on something critical that we need to do, if we would create and not destroy shareholder wealth. I will like to speak to you today on the “the need to de-commoditize our industries”. Commodity businesses are like selling cashew and groundnuts. Everybody’s product is fundamentally the same. Unless, there is a large unmet demand, with very few players, everybody competes on price. Prices keep falling rapidly. When competition gets intense, there is price war, no-one makes really good profit, some players loose their shirts, they close down and shareholder wealth is destroyed. Many of our industries today are beginning to share the character of cashew and groundnut industries. We all produce the same type of things, in the same way, for the same people, in the same places with perhaps the same instruments. Driven by competition forces, many industries are becoming commoditized with looming price wars and constrained profitability.

I will like to quote from an earlier lecture I gave at the launch of Nigeria Marketing Memoirs, titled “ Be Different or Die ( Please, see article on this blog)
“…Competition across industries today has never been more intense in our land. The Nigeria economy has become more liberalized and markets are opening up. The international credit rating of the Nigeria economy by Fitch and Standard and Poor, that puts us in the same class as leading world emerging economies like Brazil and Turkey makes Nigeria, a good destination for foreign direct investment. Democracy has been good for Nigeria and we pray for a smooth and orderly democratic transition. Multinational companies that abandoned Nigeria in the days of military rule have come back fully. Others that were on the ground, that practically kept their investment at a minimum to prepare to divest on the long run, have upscaled their investments. What is interesting about this is that leading firms in the same industry are upscaling their investments at the same time creating a level of intra-industry or intra-category competition on a scale that has never been seen. We see this especially in the manufacturing sector, in industries like food and beverages and the breweries.

On the other hand, we see competition pressures driven up by the forces of deregulation and re-regulation. Monopoly powers which protected the in efficiencies of incumbent players are breaking down as we have seen in telecommunications, and we will see in other utility industries. Deregulation in financial services is leading to the convergence of playing fields of insurance and traditional banking that has been hitherto separated. We now hear words like “bancassurance”, a lingo which had not existed in the Nigeria financial services vocabulary. And re-regulation as a result of the Soludo Solution in financial services has created new competitive situation of well resourced industry armies, consolidated firms with consolidated arsenals pointing towards each other.

Digital technology which we call digitalization has also been a key driver of the new competitive pressure. It is creating substitute products with new economics that is forcing down prices in industries. In telecommunications, we can see the now established presence of international calling card business using new internet technologies that have forced down international calling rates from as much as N120 five years ago to about N15 today. Digital technology is creating convergence in industries that we will traditional consider as very distant from each other. A payment services nexus is emerging between the financial services and telecommunications industries. The two industries can bring different assets in market power and competencies to compete or co-operate in the emerging nexus.

Our simple story is that the combination of the three dimensional forces of Democracy, Deregulation and Digitalization which we call 3D forces is fundamentally changing the structure of many industries with potential seismic effects. This combination creates new challenges as well as opportunities. Old paradigm are turned on their heads. Rules of the game are changed. The defining paradigm of this new competitive situation is the rise of the power of the customer to new levels across industries. The customer is the beneficiary of the new competitive situation. The customer now has got real and many choices. He has also become more sophisticated. He is more widely traveled compared to the past. He is exposed to international media through satellite television, movies and DVDs. He knows the standards of advance markets and demands that his products perform to the same standards. He understands the economics of his relationship with your business at an amazing level. He is also becoming organized along with his peers in associations to protect their interests. We are witnessing a new phenomenon of organized customer power, something that we are not used to in marketing practice in Nigeria. The GSM boycott of 2003 is a new development of organized customer bargaining power and the emergence of “Consumerism” as a new marketing factor. Consumer rights movement and advocacy groups are emerging, a feature of more advance economies. The customer may no longer be much atomized. The organized association of customers supported by Customer rights advocacy movements, challenges traditional marketing practice in Nigeria.

As we have said earlier, our collective response to these new competitive situation has been largely to copy each other. We are all running after the same customers, offering them the same things, in the same way. Players are essentially copying each other with the result that customers can no longer see differences in offerings and services among players. There is a growing commoditization of industries especially in the service sector, a situation where we all run after the same customers, with the same offerings, in the same way. Price has become the only point of difference, which in itself is not a sustainable difference as players drop prices easily to match each other. Price wars are now on the increase, disguised as lotteries and promotions across industries. Even the banks are now doing lotteries. Industry value and profitability are being destroyed as a result of businesses not being able to deliver relevant, unique and tangible differentiation to customers. The consequences for re-investment and growth are serious if businesses cannot make good returns on their investments. Public savings mobilized into the stock market at an un-precendented level in the last two years may be threatened and even destroyed. The worst situation for savings and investments in Nigeria is for the public to loose confidence in the capital market because businesses have failed to give them good economic returns on their investments. It will take many years to rebuild public confidence in the capital market…..”

Businesses needs to return to the fundamental essence of strategy which is to elect to serve unique customer groups in a unique way with unique offerings based on the firm’s unique capabilities and competencies. As senior managers in our businesses, who feel the heat of commoditization of price wars in our operating unit, akin to bayonet to bayonet street fighting and blood letting, we will need to re-pose the question to our leaders “ How would we deliver unique values to our customers in ways that cannot be easily matched by others?” This perhaps today may be the biggest question of business in Nigeria.
While this question looks simple, it is a real tough and hard one. The most usual stereotype answers usually sounds like “We will serve the customers better” (Emphasis better). There is however a fundamental difference between the words “ better” and “unique”. As I searched this morning my various dictionaries, I could not find where either of these words were used as synonyms for each other. Key synonyms for better were “improved, enhance” while the key synonyms for unique were “sole, one of its kind, matchless, distinctive, irreplaceable”. In essence, doing things better is not necessarily doing them uniquely. This is one of the biggest lessons for Nigeria businesses especially in the service sector that better is not necessarily unique. Using the business jargon, better is operational excellence, uniqueness is strategy. Operational excellence is therefore not strategy.
Many of us in the same industries are becoming operationally excellent in the same way but not necessarily becoming unique. Our investments in operational excellence may therefore not be paying off, effectively on our bottom-line as we may not be able to charge significant price-premium, ensure good profit and create sustained shareholder value.

As senior managers, let us therefore engage our business leaders and the boards of corporate organizations that operational excellence is not the same thing as strategy. That efficiency in serving the wrong markets is just a good as inefficiency on the long run. That even when organizations serve the right markets efficiently and they do so in ways that do not deliver unique values and offerings to their customers, their efficiency will not be effective on their bottom line. They will only become efficient, perpetual price -cutters who destroy economic value and the wealth of their shareholders.

Yet Brothers and sisters, being unique is easier said than done. It is tough these days to find and sustain uniqueness in a world where we all go the same LBS, we have access to the same technologies and recruit the same type of people. There will be two critical sources of building uniqueness in the coming period. They are

a) Building organizational capability to unlock and find unique customer insights on which unique products and services could be built. There are structured methods and processes of doing these. Organizations will need to develop and find them.
b) Learning and institutionalization of organization memory: As we all try the same things at least at the beginning, organizations who learn best from their experience and their environment and have developed a structured way of using such learning to build organization memory to serve their elected markets uniquely, are likely to see on the long run what others do not see.

The combination of organizational capability to unlock unique customer insights in a structured learning process will help in building the necessary proprietary assets on which unique service capability could be built. By so doing, we will be de-commoditizing our industries, reduce the tendency for price wars which destroy economic value and shareholder wealth.
I thank you for listening.

Olu Akanmu. December 2006