Technology has made it easier to start a new business by lowering barriers to entry, also known as startup costs. As a result, industries with already low barriers to entry have been saturated with companies that have commoditized services.
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This has affected industry profitability by encouraging a competitive strategy based solely on pricing. For companies that do not have a solid business strategy, this has triggered a race to the bottom as they try to compete by continuously lowering prices.
We have partnered with many companies in the logistics industry. We have seen it firsthand. Small and midsize logistics companies are impacted by profit erosion and service commoditization.
This is true across all segments, including ocean, air, and ground freight transportation companies, freight forwarders, NVOCCs, distribution centers, custom brokers, carriers, and more. Yet, some companies have been able to avoid the price competition.
As a result, we want to share five elements that small and mid-size logistic leaders have used to develop a competitive business strategy that has allowed them to differentiate from competitors, avoid service commoditization, and increase business profitability.
Core Values and Core Purpose
A company’s Core Values and Core Purpose are critical anchors of success. Core Values are a company’s guiding principles and dictate the acceptable behaviors and actions of its employees and leaders. These values provide a framework for everyone in the organization to discern right from wrong.
Core values provide organizations with a unique identity, something critical in shaping a company’s brand, culture, and uniqueness. They are also critical to an effective recruitment process as they allow you to attract and hire prospects that align with your company’s culture, ensuring a cultural fit.
While the Core Values are the guiding principles, the Core Purpose is the company’s soul. The Core Purpose answers the question, “What is the reason for the organization’s existence?” other than generating profits.
As Jim Collins and Jerry I. Porras put in a Harvard Business Review article, “The core is the organization’s reason for being; An effective purpose reflects people’s idealistic motivations for doing the company’s work.”
Research has shown that if companies can ignite and capture employees’ hearts and motivation, they will give you 40% more discretionary effort and better customer service and employee retention.
A Strong Business Differentiator
A key aspect of outperforming the competition is your ability to differentiate.
Michael Porter, father of modern business strategy and one of the world’s most influential business thought leaders, said, “A company can outperform rivals only if it can establish a difference that it can preserve.”
To do this, you must first understand your closest competitors, answering questions like who they are, what services they provide, and what market segments they serve.
Once you have a clear idea of the competition, put together a team of people (preferably critical thinkers) and have brainstorming sessions about the best possible ways to differentiate your company from the competition. Focus on the things that they won’t be able to replicate easily.
If it takes your company years to develop such a differentiator, perfect! It will take your competitors the same (or more). If you keep evolving, you will be the lead car, and the competition will always try to catch up.
By creating a strong differentiator, you will also create a unique value proposition that will tell your customers why they should choose you over your competitor.
Create a Niche and Focus
In the world of small and medium-sized businesses, there’s a belief that every profit-making opportunity should be seized. However, some experts disagree with this belief. They suggest that focusing on a specific niche is a better strategy.
When creating a niche focus, be specific, specialize in a market segment, industry, service, or product, and become the leading authority.
Your business could specialize in warehousing and order management for e-commerce websites. Alternatively, you could focus on being a freight forwarder that specializes in transporting hazardous materials to specific countries or regions. By doing this, you would carve out a niche and distinguish yourself from the competition, becoming a renowned expert. Customers generally prefer to do business with experts in their field.
By focusing your business, you will realize other benefits like increased efficiency, a reduction in errors/mistakes (resulting in happier customers and increased customer retention), and a more focused marketing strategy.
However, be aware that creating a niche requires some trade-offs. It may be hard to remain committed to your new focus when a new opportunity knocks on your door. Equally important as knowing what to focus on is knowing what not to focus on. Avoid temptations.
Operational Effectiveness vs. Strategic Positioning
Often, leaders believe that operational effectiveness can lead to a sustainable competitive business strategy. Operational effectiveness is doing the same things that your competitors do but better. If you decide to take this route and differentiate your business, be aware that, at some point, the competition will catch up with you.
A differentiated competitive strategy focuses on strategic positioning by doing things differently to deliver superior value and create a unique value proposition for customers.
Companies are unique; even small and mid-size logistic organizations can create strong differentiators. You just need to be open-minded and willing to go through the cycles of innovation—trial and error.
You must be willing to try new ideas, seeing the innovation cycle as an opportunity and not an expense. Be open. Invest in innovation and encourage and empower people to try new ideas and technologies.
People
It doesn’t matter how well-planned your competitive business strategy is – if you cannot execute it, you will not succeed. And for that, you need to hire and retain the best people.
It will be impossible to cover this topic in a short blog, but we will dedicate more blogs soon. For now, focus on three things: 1) understand that people are critical to the success of your organization, 2) hire the right people for the right seat, and 3) retain them.
Hiring in a rush is one of the most common recruitment mistakes. Take time to truly understand the organization’s needs and generate the job description and requirements that meet those needs.
Then, clearly outline the company’s core values and the skills required to execute the job. With these critical pieces of information defined and documented, you can hire the right person for the right seat. This means you hire someone who shares your company’s principles and values (a cultural fit) and has the skills required to execute the job.
After you have hired the right person, your job is to retain them as long as possible. Research indicates that turnover costs can range from 30 to 50 percent for entry-level employees. For mid-level employees, these costs can be as high as 150 percent of their annual salary.
To succeed in building a winning logistics company, you must define your core values, differentiate your business model, create a niche, strategically position your company, and hire and retain the best people. Embracing these elements is key to avoiding commoditization and price competition.
You are now armed with the five secrets to developing and executing a winning business strategy, and I look forward to seeing your future success.
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