FORUM, June 2001 p. 14
In search of competitive relevance

By Andrew Razeghi

The United Kingdom has a wonderful phrase: You are being made redundant. In the United States, this translates to you’re fired! Legally, it’s the job that is made redundant, not the employee. Either way, the words rarely fall on welcome ears.

Like the poor sap holding the pink slip, you are rendered irrelevant. This, and nothing else, is the greatest threat you face in your pursuit of growth.

Phrases such as "if we only had more staff," "if we only had more time," and "if we only had more money" should be the least of your concerns. Fear "if we were only relevant!"

What does irrelevance feel like?

Like individuals, organizations are also made redundant, with one small difference: when your organization is made redundant so too is your job, your co-workers’ jobs, and your vendors’ jobs. Consider the body count of the first quarter of 2001: Nortel shed 12 percent of its workforce, National Steel 10 percent, and EMC 12.5 percent. In April, Motorola announced its first quarterly loss in 16 years and missed analysts’ already lowered expectations due to weak demand for cell phones, chips, and telecom equipment. Motorola’s response: "can" career employees, pummel plants, and board up business units. All the while, most traditional economic indicators including industrial production, employment, income, and trade weren’t indicating recession. Could it be that these organizations had lost touch with their customers? Were they feeling the pains of irrelevance? You bet.

Organizational irrelevance is unnecessary. It doesn’t have to happen. Sure, the market made a significant left turn between Q200 and Q201, but haven’t we seen this before? Moreover, who would want a perfectly risk-free future anyway? A flatlined future yields minimal risk and, therefore, minimal returns.

Forget operational excellence, performance improvement, and ROI. If you have no redeeming value to offer those that fund your pursuits, your ROI (return on irrelevance) will be 100 percent. Don’t just take my word for it. Ask Karl Marx, the designer of the Edsel, or any one of the original cast members of Diff’rent Strokes.

The question remains, now what?

Competitive relevance is created when two or more functional areas of innovation (i.e. product, distribution, marketing, financial, and people) meet to fulfill the unarticulated demand of customers in lieu of competitive substitutes. Competitive relevance is systemic innovation versus functional innovation.

Competitively relevant organizations excel in the design and management of innovation systems while competitively irrelevant organizations compete with linear functional innovations. Take Napster, for example. Its lack of financial relevance is its greatest impediment -- not the law. In order to achieve competitive relevance, Napster must pursue not only product innovation alone, but also financial innovation. It needs an innovation system to remain relevant.

"A-B-C. Always be closing," declares Alec Baldwin in David Mamet’s screenplay Glengarry Glenross. Mamet’s essay on the pathetic lives of boiler room real estate salesmen carries a simple and dangerously honest message: give your customers a compelling reason to part with their money. Period.

Competitive relevance requires the constant pursuit and integration of customer insights. It is not a sales event. Competitive relevance cannot be sold, it can only be bought. In fact, when you really learn how to create it, demand for your organization will flourish.

The role of competitive relevance is to create a customer value proposition that is beyond compelling -- it must be both unique and relevant.

If you are unique and irrelevant, your members or customers could live without you and those that can’t will be few and far between. Think brick-and-mortar transaction-focused stockbrokers. Is it no surprise that the smart brokers have suddenly changed their business cards to read "financial planner?" What relevant value does a traditional stock brokerage firm offer its customers versus a digital brokerage?

If, on the other hand, you are relevant but not unique, you face margin squeeze. Think of your local florist that competes for the attention of an infinitely large customer base served by an infinitely large number of competitors.

If you can attain both uniqueness and relevance -- now you’re a significant player on a grand scale. Think Starbucks.

1. In search of product innovation, McDonald’s unleashed organizational innovation!
   In its search for new wealth creation, McDonald’s restaurants decided to get into the breakfast foods market in an attempt to increase same store sales. The idea resonated with relevance both financially and with customers; however, the concept could easily have been made redundant given McDonald’s historical staffing strategy -- teenagers. They faced a significant competitive threat -- not from customer appetite, Burger King, or Wendy’s for that matter, rather from within. While their staff was running to beat the bell to homeroom, who would serve McDonald’s tasty Egg McMuffins at 9:00 in the morning? The innovation hurdle was in the employment structure, not the new products.
   
   McDonald’s required an innovation system in order to remain relevant. In this case, innovation in both product and people were the prerequisites to new wealth creation. As a result, McDonald’s shed dependence on its traditional staffing model by expanding the age continuum of its store employees and thereby de-risking its exposure to competitive irrelevance.
   
   Ask yourself! What are the business model implications created by the introduction of new products and services? Do we have the right people in place to deliver on innovation?



2. In search of marketing innovation, the Grateful Dead discovered financial innovation!
   In this corner, Napster. In the other, the Grateful Dead. Both are music industry innovators. Both gave away music for free. One made money, the other didn’t. One is relevant, the other isn’t. Why?
   
   Napster is a wonderful technology that is being rendered irrelevant due to its apparent inability to make money -- what dot-commers like to call "monetize the relationship" -- to say nothing of lawsuits.
   
   Conversely, the Grateful Dead, who set music free long before Napster -- their own music, of course -- had a viable economic engine to support their habit. In fact, at live shows, the band would invite fans with recording devices to the engineer’s sound board, allowing them to render CD-quality recordings directly off the board -- free!
   
   The Grateful Dead had an innovation system -- an innovation hybrid of marketing and finance. While Napster’s economic model is beholden to an ill-designed advertising/subscription pricing strategy, the Grateful Dead focused on the sale of concert tickets and merchandise, not music, for their bread-and-butter. Music was the hook, the "opium of the people." This explains why you could sell practically anything at Dead shows, from peanut butter sandwiches to hair braids -- with one exception. Grateful Dead merchandise was verboten (unless of course sold by the Dead). The Dead broke the stranglehold of greedy music distributors by changing the economic engine that fueled their success.
   
   Incidentally, a little innovation secret for you: The Grateful Dead went on to become the highest grossing band in the history of rock ‘n’ roll by giving away music.
   
   Ask yourself! Is there a better economic engine for our products? Can we package and price our products and services differently?



3. In search of distribution innovation, Charles Schwab created an industry!
   What’s a banker to do? With loan portfolios growing modestly, interest rates declining, and fees and interest on credit cards basically flat, how can a bank grow? The difficult answer -- innovate. The easy answer -- consolidate. Who can blame ‘em? When First Chicago bank merged with Detroit’s NBD, its revenues tripled. Why bother with visionary talk about organic growth when you can buy yourself a front row ticket to the show?
   
   While mergers allow banks to combine overlapping record-keeping departments and trading desks, they don’t create new wealth. Certainly, if successful, the assumed cost synergies will yield greater scale, but is this relevant for customers?
   
   Then comes the cross-selling logic. Citicorp and Travelers Group claim they can produce an extra $1 billion of income by cross-selling products to customers. Sounds good, but the claim runs counter to the reality of the past 20 years. The trend has been away from proprietary product and distribution systems, not toward it. Remember when Fidelity used to market only its own funds? Enter the discontinuous change created by industry revolutionary Charles Schwab -- offering hundreds of different funds while marketing only a few funds of its own.
   
   The point is, Schwab created and maintains competitive relevance. Schwab doesn’t care what fund a customer buys as long as they buy it from Schwab. As a result, they’ve mandated the "separation of church and state" (i.e. product and distribution) and in so doing have changed the industry. As for the future of cross selling, although relevant for the banks, it’s irrelevant for customers.
   
   Ask yourself! Are your products and services competitively unique? Is the power in your product or the pipeline?



4. In search of customer experience innovation, Starbucks caught a break!
   Starbucks is always closing on the sale: not of coffee, rather the coffee break. The coffee, while good, is merely the delivery vehicle for the 12-minute, latte-laden, non-fat break. It’s not only the "serducts" (service + products) Starbucks sells that are so compelling, it is the entire business model. Starbucks is competitively relevant and the proof is in the pudding (or should I say foam).
   
   From opening its first door in Seattle’s Pike Place Market in 1971, to its 3,800 doors today, SBUX continues to be recession-proof. How did they book a 10 percent increase in same store sales in 1999-2000? They sold a luxurious, albeit small, break. Like movie tickets and make-up, small luxuries are recession-proof. Coffee a small luxury, you ask? No, but the coffee break is. According to the National Coffee Association, Americans sip on 330 million cups of coffee per day. However, it’s not what is in the cup that matters, it’s what is not in the cup -- the experience. As a true measure of its competitive relevance, Starbucks was able to limit its marketing expenses to $10 million over the past 10 years in building its brand -- that’s $10 million total for all 10 years! (Miller Brewing Company spends that much on the launch of a single new beer product alone).
   
   Ask yourself! Do we continue to fight margin wars or is there a better system?



5. In search of an economic engine, Savitz saves the slingback!
   Scott Savitz and his partner Craig Starble are investment bankers -- an unlikely duo for a foot fetish fandango. Nonetheless, the pair are among the few profitable e-tailers (posting $1.8 million in revenue in 2000 and more than $30 million projected for 2001 while turning their first profit a short six months into operation).
   
   Why shoes? With customers throwing $2.5 billion per year at mail order catalogs for everything from slingbacks to running shoes, the market intuitively looked attractive.
   
   What was the magic shoe model? Traditional shoe retailers start with a 100 percent markup that is usually whittled down to 3.5 percent net margin after costs. On the surface, it seems that sans sales force, inventory, warehouses, and employees, they could significantly reduce costs. In fact, once they dug a little deeper, they did. Today, Shoebuy.com commands 30 percent margins on their products, nearly 10-fold more than the traditional retailer. How does Shoebuy do it? Innovate against a pre-defined economic engine. Bowling for dollars on the back-end is a futile exercise. Get it right up front.
   
   Shoebuy remains relevant by keeping customer acquisition costs to under $15, invoking an aggressive "fulfillment metric," and keeping staffing levels in line with its pre-defined economic model.
   
   Ask yourself! What ridiculously arcane cost structures still exist in our business? What options do we have for change?

Avoid being made redundant. In your search for competitive relevance, seek to unleash the systemic nature of innovation. Remember, your greatest challenge will not be in realizing new wealth creation, it will be in recognizing it. It may come from new products. It may come from new marketing concepts. It may come from new distribution opportunities. Or it may come from new economic models. The point is, it won’t come in the form of a brave new business model -- this is what you must strive to create.

Andrew Razeghi is a principal with Strategos, a strategy and innovation consulting firm, and a professional speaker on innovation.
Razeghi may be reached at arazeghi@strategos.com