Professional service firms looking to differentiate themselves generally do so based on client service.
Client service, as I now realise, is shorthand for discovering what your clients, or segments of your clients want and need, and then providing it. So one way an accountant may differentiate her practice is by using the annual audit as an opportunity to extend her remit to cover tax planning and profitability advice. These are services many clients will be receptive to being offered. Yet so many accountants miss the opportunity to identify their clients’ needs in order to provide the additional services they may well be happy to pay for.
If your firm can position itself as a trusted business adviser such as by offering related services that matter to your clients, you will be able to command higher prices, and avoid commoditisation. Otherwise, clients will have no other criteria on which to select your firm than price.
Yet, it’s important to appreciate that no matter how essential it is to differentiate, the reality is that it’s increasingly difficult to do so in a meaningful or enduring way, given the oversupply of providers.
The legal industry is by no means alone in having too many firms chasing the same work. Supply exceeds demand in many other industries too, making it generally more difficult to have a differentiating proposition.
The more similar brands become, the more likely people are to select on price, resulting in a downward impact on the prices you can charge. This trend is very evident to those of us in practice currently as clients haggle over price, and sometimes manage to find alternative firms to do quite specialized work at astonishingly low rates.
The reason for the oversupply in many industries is that information on products and prices is now instantly and globally available. So niche markets disappear, and as global competition intensifies, supply increases. As this oversupply is not accompanied by an increase in demand worldwide it results in commoditization of products and services, price wars and shrinking profit margins.
So, in overcrowded markets, differentiating brands becomes harder, which is in essence why law firms find it difficult to differentiate themselves from their competitors.
Even product brands are becoming more similar as people increasingly select on price. People won’t necessarily stick to Colgate when Crest is on special offer and vice versa (unless they are subject to the well know ‘pester power’ of their children who tend to be very brand aware).
With deregulation coming into effect in October, many firms will sensibly look to innovation as a way of differentiating themselves. They will experiment with innovations which they perceive the market wants or needs.
Here it’s important to first establish that the innovations are really wanted by clients. Apart from doing market research, it could help if there were a way of knowing which ideas to run with and which to put on hold. This would avoid spending unnecessary time and money on projects.
One useful tool for evaluating ideas for new products or services is given in the book Blue Ocean Strategy by Kim & Mauborgne.The book is not a light read, which may explain why I had not read it from beginning to end until recently despite having bought it in 2006.
As the book provides a practical framework and analytics for the systematic pursuit and capture of “blue oceans” it’s well worth taking the time to wade through it if you have an idea and want to assess whether it is a ground breaking one or not.
Blue Ocean Strategies
The book’s message is that the best way to break out of the vicious competitive landscape – represented by the red (bloody) oceans of competition – is to offer the market something completely different – something which makes the competition irrelevant, because there will be none.That is the definition of a blue ocean.
Examples of blue ocean industries unknown 30 years ago include mobile phones, biotechnology, express package delivery, coffee bars, and home videos. How many unknown industries will exist if we put the clock forward 10-20 years?
Cirque du Soleil
Among the many examples of a blue ocean concept the book discusses is Cirque du Soleil which was born out of a dying industry, that of the circus. Cirque du Soleil didn’t win by taking customers from the already shrinking circus industry, which traditionally catered to children.
It created new market space that made the competition irrelevant. In a crowded market the prospects for profits and growth are reduced. Cut throat competition turns the red ocean bloody whereas blue oceans are untapped market space, where demand is created, as well as potentially high profitable growth. Most blue oceans are created from within red oceans by expanding industry boundaries.
“The only way to beat the competition is to stop trying to beat the competition. In red oceans, the industry boundaries are defined and accepted, and the competitive rules of the game are known. In blue oceans, competition is irrelevant because the rules of the game are waiting to be set. …The companies caught in the red ocean followed a conventional approach, racing to beat the competition by building a defensible position within the existing industry order. The creators of blue oceans, surprisingly, didn’t use the competition as their benchmark. …Instead of focusing on beating the competition, they focus on making the competition irrelevant by creating a leap in value for buyers and your company, thereby opening up new and uncontested market space. …Value innovation is based on the view that market boundaries and industry structure are not ‘given’ and can be reconstructed by the actions and beliefs of industry players.
History shows that industries continuously evolve, and are being created and expanded over time.Industry conditions and boundaries are not given. For example, what Cirque de Soleil did was to look across market boundaries to alternatives to the circus. It ended up being part circus and part theatre.
Rather than focus on the market boundaries, they focused on the job the customer was hiring for — in this case, it was adults looking for sophisticated entertainment. Another key thing they did was to not target the existing market (that is, children), rather they targeted non-consuming adults.
Creating and capturing new demand
Blue ocean strategy is all about creating and capturing net new demand by ignoring boundaries defined by traditional competitors.
Strategy is what creates blue oceans, and value innovation is the cornerstone of blue ocean strategy. This is to be contrasted to value creation – something that improves value but isn’t sufficient to make you stand out in the marketplace. Innovation without value tends to be technology driven, market pioneering or futuristic, often shooting beyond what buyers are ready to accept and pay for.
Value innovation occurs only when companies align innovation with utility, price and cost positions. Value innovation isn’t grounded in value-cost trade off. The conventional belief is that companies can either create greater value at a higher cost or reasonable value at a lower cost – that is strategy is seen as making a choice between differentiation and low cost. However, blue oceans pursue differentiation and low cost simultaneously. They involve redefining the problem rather than providing solutions to existing problems.
So value innovation is more than innovation. It requires companies to orient the whole system toward achieving a leap in value for both buyers and themselves. The aim is to create new best practice rules by breaking the existing value/cost trade off and thereby creating a blue ocean.
Reading this book closely, has helped me avoid spending time and energy on ideas to tackle problems that currently exist – such as the lack of access to legal services by the latent market (see my earlier blog post on the subject of latent markets) Reading the book might also help you to avoid experimenting with ideas that could prove to be distractions.