Better to be on the Ends than to be Squeezed in the Middle

Business strategy has always been a fascinating subject for me, and in my last MBA Strategy class, one article that stood out was titled ‘Soft in the Middle’, an article written by James Surowiecki and published in the New Yorker in March 2010. This article highlighted how companies with successful products are at different ends of the spectrum rather than being the norm. When you come to think of it, we see companies like Wal-mart and Target fluorishing at the low-end of retailing, and yet specialty stores like Neiman Marcus and Nordstrom still manages to grow in the upper end of retail. But the middle-rung JC Penneys and Sears? They are all closing their stores. Looking at another business, Leica carves a niche for itself in high end cameras, and yet niche cameras like GoPro still makes waves. But common brands like Sony, Fujifilm and etc? They are all competing for the mass market consumers that wants everything at the lowest possible price.

Which brings us back to the fundamentals of strategy. Having a strategy means bounding yourself to certain prerequisites and rules. That means we got to choose what NOT to do. Forget about satisfying the whole market, because that is practically impossible. Just on the basis of everyone having a different willingness to pay. Then it makes sense that entrepreneurs have to craft a strategy when entering markets where goods are not a commodity. That is they have to either choose to be in the premium market or the mass market, catering to the niche segment or gaining cost advantage by huge economies of scale. This is because in business, one should not consider just getting a profit, but companies have to gain excess profits that they would need to re-invest. The level of re-investment is what ensures competitive advantage in business, sustaining the infrastructure, developing customer relationships and generally preparing the business for the long-run. It is only with the right strategy that companies can gain this excess profit – either through low margins but high volume or high margins but low volume. Though once in a while, companies gets lucky to be in the high volume, high margin business like Apple Inc.

However, there is another side to this story, that is when a company is selling a commoditized product – something that is nearly indiscernible by the average consumer or client in the marketplace. Financial services, energy, utilities, telecommunication services, agricultural produce, and education comes to mind. Granted some might say people might choose amongst these product and services and there lies some level of differentiation, but usually it is really tough to separate the point of using RBC, BMO, CIBC, Scotiabank or TD as my main financial service provider. For the average consumer out there, does the services offered in your bank really differs by that much? Nearly every competitor in these industries can replicate what their competitors are doing within a short period of time. Maybe then the first mover advantage does have some edge in these industries, since they capture much of the market first and is seen by customers as the ‘original’ one. But as time passes, does anyone still remember the first bank that offers ‘Sunday banking’ anymore? In such a commoditized industry, operators act like oligopolies, and operational efficiency and the ability to attain the highest profit margins allows that market leading position. But more importantly the one with the greatest ability to retain customers’ satisfaction truly wins. Naturally the effort to obtain that customer is much higher in industries with commoditized products and services, which is why new entrants don’t enter these industries unless they have a game-changer or ideas that would totally disrupts the status quo.

If we were to look at companies operating in industries with a commoditized products and services from the eyes of an investor, I would tend to think that investing in the market leader or the industry laggard might be the best bet. The market leader has the financial strength and the size to be competitive and perhaps be the most efficient, while the laggard has the highest chance of improvement, or by being acquired which would indicate a price premium and thus investment return. The middle ones turns out to be squeezed, unless they become the one to be successful in taking over the smallest competitor.

Thus, a company in business needs to look at its industry and competitors, and by doing this it should think about its current standing before choosing the right action to take. This will allow them to take the leap and hopefully survive in the long run. They have to be careful not to be like the passenger left with only the middle seats in an airline cabin. That is because you sure don’t want to be in such a situation for a long haul flight, would you?

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