Harvard s #1 Strategy Guru on the Key Decision for Your Business By Dan Richards November 13, 2012

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1 Harvard s #1 Strategy Guru on the Key Decision for Your Business By Dan Richards November 13, 2012 Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives. Competition has brought many once-dominant names to the brink of survival General Motors, Kodak, Sears and Xerox. Advisors ignoring the important lesson here do so 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 a top three player in market share. Porter presented a different view. The notion that you have to be the best comes from the worlds 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 is a difficult strategy to sustain over time. And second, focus on operational efficiency alone leads to a downward spiral of price competition as firms try to squeeze other entrants by capitalizing on their lower cost structure

2 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, Hermes 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 inevitable 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, unique niche retailers Apple Stores, H&M, Lululemon and Zara. Even within the realm of mass retailers, look at the success stories of upscale entrants like Bloomingdales, Nordstrom, Neiman Marcus, or Target that caters to a design-minded middle class, or lower-end retailers such as Winners and Dollar General. These retailers each deliver a unique value proposition to a targeted audience and present a dramatic contrast to the struggles of Sears and JC Penney that cater to everyone and have strong appeal to nobody. 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: - 2 -

3 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 aren t differentiating if everyone uses the same words to describe how they work, nobody stands out. What you do or who are your clients? All these answers focus on what advisors do rather than who are their clients. 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 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 most successful advisors target new clients based on minimum assets and price sensitivity almost never by the type of client. 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 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. 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

4 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 that group. 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 highly successful advisor who has a traditional generalist client base but who especially enjoys dealing with successful entrepreneurs and their issues related to multiple holding companies and complex succession plans. 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 within 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 his entire two years at Harvard. The limited opportunities to hear from today s number-one 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, your problem may be that you ve fallen into the trap of putting too much focus on operational efficiency and being the best and 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

5 Dan Richards conducts programs to help advisors gain and retain clients and is an award winning faculty member in the MBA program at the University of Toronto. To see more of his written and video commentaries, go to Use A555A for the rep and dealer code to register for website access. For a free subscription to the Advisor Perspectives newsletter, visit: