Insight to Action

Successful retailers compete by being different.

The essence of good business strategy is optimizing the whole, not optimizing the parts, and one company's whole is different from another's. Wal-Mart is the ultimate low-cost producer, spending very little on advertising, about three tenths of one percent of its revenues. Conversely, Target spends almost eight times more than Wal-Mart on advertising, about 2.3 percent of revenues. Target's approach is to make the store a brand -- very different from Wal-Mart. One is a cost strategy; one is a brand strategy.

There are two primary ways that one company can outperform another -- by getting customers to pay higher prices or by operating on lower costs. The bottom line is: if you have a strategy, you must be able to link it back directly to your P&L.

To prepare the right strategy, companies must understand competition. Competition can be defined as doing what others are doing, just better. This is how most companies compete and why most companies are not above-average performers. It can be a mistake for rivals to offer similar value and chase the same customers.

The real winners are companies that compete by being different. Dell is a perfect example. At age 19, Michael Dell told his parents he was going to quit college and go out and beat IBM. Using a unique approach to the business, Dell achieved his goal. Similar success stories can be found throughout retail -- Southwest Airlines, Enterprise in rental cars, IKEA in furniture, Zara in fashion. These companies have something important in common: they have competed by being unique, not by trying to one-up their competitors.

Define value to reach customers

In formulating a unique strategy, businesses must define what value means to their customers. The most successful retailers get inside their customers' heads to create value. And remember: you can't capture more value than you create. Victoria's Secret struck gold with a unique insight by selling classical CDs at lingerie checkout counters. This initiative was so successful that at one point Victoria's Secret sold more classical music CDs than any record company.

A good business model calculates value for the customers. While a student at Boston University (BU), Michael Bronner hit the jackpot by calculating the value of a coupon book business. Bronner shifted his orignal business model from selling the books to students to selling customers to merchants who would invest to reach the customers. He gave the books away for free to the 14,000 BU students rather than sell them to possibly 700. With the original business model, he might have realized $5,000 worth of value for the students. The new model created more than $100,000 worth of value for the merchants -- that's 20 times the value of creation just by rethinking the business.

Bronner then went a step further by eliminating distribution as part of his job. To achieve campus-wide distribution of the coupon books, Bronner convinced the BU Dean of Students to distribute the books to every student mailbox -- for free. The Dean agreed because it created positive PR for the university. Other universities and businesses picked up on the idea. HR departments were happy to hand out the books to develop positive feelings among their employees.

IKEA also has eliminated steps while creating value for its customers. IKEA's message to its customers is: "If we work together, we can save money. We're not going to charge you for things that you can easily do yourself." At IKEA customers shop without help from salespeople and they collect their own merchandise in the warehouse. The beauty of IKEA's strategy and its execution is that its customers don't feel like they are getting stiffed. It is self-service that's done in a spirit that makes customers feel good.

One of the reasons IKEA's strategy works so well is that it is focused on cost. Companies often fail when cost is not a primary driver, when they focus on the customer and marketing sides first. With cost in mind IKEA created flat package, DIY delivery, which reduces shipping costs and product damage. Customers take the flat packs home in their cars, saving on delivery; and they have instant gratification because they don't have to wait days or weeks for delivery.

Make tradeoffs to gain customers

Tradeoffs can be a key component of a successful business. IKEA has made a lot of tradeoffs to offer the low prices its customers are looking for. When you tailor your business to customer value, you give customers a reason to shop in your store or use your business. IKEA considers sales associates a cost with no value. The company also trades a level of product durability for lower prices.

For Southwest Airlines, tradeoffs led the company to clarity of strategy. That clarity came from a real intuitive understanding of the P&L of an airline. Airlines want to fill their seats. Southwest determined that it really doesn't matter if the plane is filled unless it's is in the air all the time. So company strategy focused on all the things Southwest would not do to keep the planes on the ground longer, such as flying into congested airports and offering meal service. The bottom line? Southwest keeps its planes flying more of the time and it still makes money with low ticket prices.

Can you copy winning strategies

? If you want to copy IKEA or Southwest how would you do it? You would have to copy everything they do to create the same kind of success, but that's unrealistic. By optimizing the whole so that all the parts fit together tightly these companies create a success story that is difficult to copy. That's what it means to have a winning strategy.

Joan Margretta is a Senior Institute Associate at the Institute of Strategy and Competitiveness at Harvard Business School. She authored the book, What Management Is, How It Works, and Why It's Everyone's Business. This article is based on Margretta's keynote address at the Spring 2005 Retail Executive Summit.