FMI recently attended a popular construction trade show in Las Vegas and spent time with several current clients as well as other companies. We discussed various aspects of the industry, the state of their business and path-forward related topics. We spoke with contractors, associations, building products companies and equipment manufacturers to understand what those organizations do, what they sell, how they market, and what challenges they face.
Nearly all of them use the terms “value add” and “differentiation” when discussing their products, services or how they execute projects. There is a continual disconnect in organizations concerning the definition of these terms. Differentiation alone is not “value add.” Value add involves that “extra” customers receive for the price they pay. To have real differentiation, it requires an organization to produce “unique” products or services with little to no competition and a lower sensitivity to price. Differentiation requires an organization to reach much further than just a little extra.
What core pillars make an organization fundamentally operable before it adds value and then differentiates itself from other companies? At the core, four definable characteristics should exist in an organization, thus creating an environment where differentiation can grow. These are operational execution, strategic excellence and strong human capital supported by the fourth, adaptive improvement.
Operational execution is generally an internal component of processes, systems and structures. Operational execution drives the organization like the engine in a vehicle. Strategic excellence is an external component that defines doing the “right” things in the markets with the highest level of excellence. It is being in the right places, at the right times, with the right products and services. Strong human capital is all about an organization’s people. This pillar is both external and internal and suggests having the right individuals, in the right positions, delivering excellent work with strong leadership at the helm.
The first three characteristics are supported by the fourth, adaptive improvement. Operational execution, strategic excellence and strong human capital are floors of a building being constructed, while adaptive improvement is the tower crane lifting the proper pieces in proper order. Adaptive improvement is an organizational mechanism whereby the organization is continually measuring, researching and listening to internal and external needs. The organization then uses these metrics to make positive changes to operations, strategy and people. But where do “value add” and ultimately, differentiation, fit in here? Many organizations believe if they do these core characteristics well that they effectively deliver value add and, with some distinctive twists, differentiation. However, many organizations do the above well but are still only “me too” organizations. You have to reach much further today to deliver differentiation. The market demands it.
When a business desires to deliver true differentiation, a change in thinking and definition needs to take place first including the assessment of the four characteristics mentioned above. Think of this with the common “good, better, best” strategy. Good strategies are generally based on price with no real differentiators. Better strategies contain some aspects of value to the customer that make you better than the next person. Best strategies are where differentiation sits and says, “You are like no one else.” But how does an organization develop this type of differentiation? It does not happen overnight. It takes time and execution of some key factors.
The one factor most missed is actually taking the risk when good research suggests the possibility of a strong return. This involves two main elements. One, you have to do proper investigation and research your approach. The second element requires that you develop a clear strategy and act on the data. Sounds simple, but many companies make risky decisions with neither valid investigation and research nor clear strategy. They miss the mark and often land in the “me-too” world or some degree of “value add.” These organizations do not always fail. Some organizations that deliver standardized projects or commodity products do very well. Many even create real value-added solutions to customers. Many are happy to continue doing just that. However, when an organization desires to deliver differentiation, the risk is high, and clear focus on strong investigative research is a must.
One particular product company does these core pillars well. In many aspects, it is a best-in-class organization. It is known for delivering high-quality products and great service in the right markets. It hires qualified people and has high retention and strong leadership. More than a decade ago, this organization desired to develop a new product to compete in a product category where its core competencies had a strong fit. After several years of development, it made a risky decision to scratch the project and start over. This company spent sizable dollars, invested many man-hours and had a decent product nearly ready to go. But it wanted to go bigger.
This organization had developed new technology that suggested it could develop this product with an electrical drive system stronger and more efficient than anyone thought possible. Through thorough research, it discovered that there was a clear possibility not only to outperform the electrical class of products it would compete with, but also to challenge (and potentially outperform) various products in the much stronger hydraulic class of products. The research overwhelmingly suggested a sizable marketplace and contained valuable customer feedback that this new differentiated product would not only be unique but also in high demand. This confirmed the initial hypothesis that suggested it could create an entirely new class of product performance. So it started over again, scrapping old ideas and thinking much bigger. After 10 years of development, the product launched and has been a great success. Not only did the company continue the value add it is known for, but it also developed clear differentiation in the market. It changed market perceptions in many ways. The product is clearly a value add, but also to have this product perform at or better than its counterparts in a completely different class is true differentiation.
Being in Las Vegas, one may think of gambling as an analogy concerning what it takes to gain a return on risk when relying on faulty data for the decisions. One game in particular comes to mind. Roulette. This game is quite interesting and risky in many respects. There are various levels in the betting process. You can bet on a color or odd or even numbers, and if you win, you are paid 1:1. You can increase your payout, but you have to narrow the field for your bet. You can bet on a block of numbers from 12 at one time, down to two. The lower the quantity of numbers you bet, the bigger the payout. The most risky bet is the single number. If you bet on a single number and win, it pays 35:1.
The risk for an organization is that differentiation really lies in the high-payout, high-risk bet. It may not always be the single number bet, but it is the high-risk, high-reward bet that defines differentiation’s risk. However, there is a pitfall waiting for the player in roulette. A display board is always present showing that last 12-18 numbers that were played. The game of roulette is a game of chance where the house has a 5.26% edge that no strategy can overcome. Many players try and “game” their bet by relying on some pattern in the display board. Nearly all professional roulette books, websites and authors will tell you that no such ability exists. In creating real differentiation for an organization, roulette gives us two valuable lessons. One, risk is part of the reward. But two, without proper data to suggest a clear direction and outcome, it is just a bet.
There are steps construction products organizations can take to break the house edge when placing their bets. First, assess the four characteristics; operational execution, strategic excellence, strong human capital and adaptive improvement. Study the game first and then build the healthy organization that many are fearful of building. Second, develop robust research, strategy and decision making practices. Third, begin taking some risk on differentiation (or even start with value add) but without roulette’s false information follies. Lastly, start pushing the drivers — strong leadership, consistency in the market, routine measurement, customer voice and forward vision.
Bryan Kucinski is manager of strategic accounts at FMI Corporation. He can be reached at 303.398.7225 or via email at email@example.com.