Monday, February 25, 2013

Strategy Death to be No.1 or No.2

In business colleges we are taught about strategy and business techniques to remain in competition and derive competitive advantage. Strategy to become No-1 or No-2 is the most devastating concept being built within the mind of the top management. Jack Welch used to follow this concept and we imitated the same with a blind vision to replicate the same. Jack Welch achieved through this formula since his industry and geographical economics was different. We replicated the process blindly leading to a catastrophic market of increased competition with a policy of imitation. Profit earning metrics were imitation or copycat which ruled over the several decades.US, Europe, China and India all adopted the same metrics and now the results are very clear.

Profit should be measured as the return of capital invested over the long term. But we measure profitability with our competitor’s business numbers. Often business takes wrong decision following the emotional trap of competitors copycat strategies. Copycat strategies are created by tweaking the original strategies disguised under the name of Innovation. We don’t focus on our own individual innovation of existing strategies but we do brilliant imitation of competitors.

One of the biggest mistakes being adopted by the business heads are that they do comparison without taking into account length and structure of an individual industry. Structure of an industry plays a pivotal role for designing the revenue and profitability sharing which is often miscalculated. A best example to give shape is the stupendous growth achieved and compared by US financial system with Information Technology growth.  In my research I find that US colleges used to teach the growth momentum correlation of financial and information technology industry. Well we all know that both the industries are different in every terms but why the books and lectures were designed to teach the mass is still unknown.

It’s correct that US financial system existed from a long time but analysis of the collapse of Lehman Brothers, Bank of Merrill Lynch and many others reveals that they followed the same suit of competition with IT industry. Well in my research I find the profitability was measured in terms of imitation of products within the competitor industry. Similar mortgage products with tweaking in interest rates were flooded on the streets of US which lead to the stupendous growth of leveraged deals. At the same time these companies rules the Wall Street and earned astronomical business growth. I find in my research that the reflection of the astronomical profits on the bonus being earned by the US financial street players. Copycat lead to stupendous growth which is being enjoyed by the global market in the form of 2008 recession.

Top management often takes strategy as a number race where as it should be used to generate value proposition. We forget that there are many needs to be feed and many processes to meet which will final lead to unique competitiveness. Competition race leads to the final destination of copy cats. Well this is the prime mother of duplicate product industry. I don’t want to name the countries who are leaders in the duplicate industry but they are damaging the true competitiveness of the market.

Once a strategy is being changed into a contest over every sales then price becomes the choice factor for the consumer creating a stupendous damage to the industry in the long term which finally increases the merger and acquisition perspective. In short price competition leads to merger and acquisitions. We often read in management books that economies of scale and growth are the prime growth engines for a corporate/business over the long term. But an economy of scale is achieved at the cost of copycats while participating in the race of competition.

Competitions lead to only one way which is domination of industry over the long term. But in my research I find that till date not an single company in the global map who is a leader has managed to be the most profitable ones.

Changing macro factors, geopolitical factors snatch the crown of No-1 and No-2 over the years. The collapse of the US financial system is the biggest proof of the pudding. A company where one goes for a competition to earn profits enters into the deadlock street of imitation/copycats. This is what has happened in the US and European financial system.

Business profits should for struggle to make and not to earn through imitation. Since through imitation one will reduce the overall performance of the industry in the long term and hence one day either of the two companies goes for a single entity. In my research I find that companies compete for profits with their direct rivals, but also with their customers, their suppliers, potential new entrants, and substitutes. Profit to be earned from every corner/department of the business organization is a fatal slow dead concept being adopted and blindly followed. Since profitability from every segment creates malpractices and often imitation of products. In India we find similar type of insurance products from various companies and there are ambitiously working for promoting their products. Now misspelling has been the king from this segment of the industry due to extensive duplicate products. Prices over here were the form of commission being deployed to increase sales and finally lead to malpractices. Everyone knows about the way insurance products were sold in India prior to IRDA interfered into commission structures.

In my research I find that after the competition is on the full swing the price become the factor of choice for the consumer. Hence if I lower the prices then imitation gets out of the competition bandwagon and kills copycats. I have found that if price competition comes into the playground copycat percentage takes a huge u-shaped turning over the industries statistical map. In my research I find that lowering prices can be of great help to eliminate competition and drive the industry into the circle of competing for profits. Competing profits needs to strategies without following the channel of copycats. Cost Accountants are the only ones who can work extensively for designing the cost structure of an industry where profit is the competition motive curtailing out the copycat theory. Innovation and profit motive are the only survivors for all the industry in the long term.


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