“The purpose of business is to create and keep a customer.” — Peter Drucker
Michael Porter was once regarded as the leading light in business coaching and consulting. His consulting was based on an isolationist strategy: Find a market that your competition isn’t in, enter it, protect it. The diagram above illustrates his once-lauded theory. These days people describe it in terms of scarcity. There was a time when it made sense but that time no longer exists. The internet, social networks, product parity, disruptive technologies (Uber, Wix, AirBnB) have eliminated the once-coveted market isolationism that Porter encouraged. Mr. Porter’s company filed for bankruptcy three years ago.
Growing business does not happen because a business does what the competition doesn’t. It grows because it creates and keeps customers regardless of competitive positions. Porter’s fallacy scales appropriately to small business. Business owners often spend endless time and thousands of dollars searching for their own “X” factor–the things that they do that their competition doesn’t (Bad logic: We do “X” and they do “Y” = We Win). Phrases like “differentiation” and “set yourself apart from the competition” are common conversations. Yet according to Drucker’s sagacious insight the very purpose of a business is to “create and keep” a customer. The purpose of a business is not to isolate itself OR to determine success in terms of the competitive market position. That type of “business is war” thinking fails to succeed in a modern economy primarily because it wrongly assumes that value-added customer service is equivalent or the automatic by-product of a theoretical Us vs. Them battle plan (Note: The difference between business and war is that the objective of business is not to kill the competition. It’s to create an whole bunch of mega-happy customers who will always use your business and tell all their friends about you because your company always adds value to their life. Business owners or consultants who encourage a militarsitc and combative attitude should generally be avoided because they spend to much worrying about things they can’t control rather than innovation, fresh-thinking, and adding value to their customer’s lives.)
As markets and products continually reach new levels of parity the notion of even being able to find a unique market position against the competition becomes absurd. Power and scarcity have degraded too quickly for anyone to say “I’ve got a lock on THIS particular market/product/service.” The pace of change is too accelerated. Today, strategy has absolutely everything to do with one central question: How can I continually add value to my customer experience? That means that owners and managers must accept innovation as normalcy. El Dorado just an’t out there.
Drucker’s observation leads to proactive questions: How does my business add value to the customer regardless of competitive positions? What innovations does my business need to accept and embrace, regardless of competitive moves? How well orchestrated is my total user experience? Is my strategy embedded in my operations? Is my company making nimble shifts on a regular basis in order to raise our value contribution? Is my company making and keeping customers…and how?
The product that any company is selling is the experience that the company creates for the customer. This framework is the only way to continually improve the quality of the customer experience. At the same time, leaders and managers who design strategies around perceived scarcity in light of massive parity will constantly define their success in lieu of their position against commoditized competition–thus becoming commodities themselves.
For all of his success Mr. Porter’s company failed because it encouraged a business to cut itself off from the competitive marketplace, to define success in incorrect terms, and ultimately because it ignored Drucker’s advice: Your business, my business, exists to create and keep customers…and that has nothing to do with what the other guys are up to.