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Getting Better Isn’t the Same as Being Different · Modularity Podcast

• 0:00
  Here's a number that should bother you.
• 0:01
  In the 1980s, R.R.
• 0:05
  Donnelley, the leader of a commercial printing industry worth more than five billion
• 0:10
  dollars, had a profit margin consistently above 7%.
• 0:15
  By 1995, that margin had fallen to less than 4.6%.
• 0:21
  And during those same years, Donnelley and its rivals were buying faster presses,
• 0:28
  running them harder, and cutting crew sizes.
• 0:31
  They got better at almost everything, and they earned less.
• 0:36
  That sounds backwards.
• 0:37
  How do you get more productive and make less money?
• 0:40
  Because everybody did the same thing at the same time.
• 0:42
  This comes from Michael Porter's 1996 Harvard Business Review article,
• 0:46
  What Is Strategy?
• 0:48
  The big printers were serving all types of customers, offering the same printing
• 0:52
  technologies, and investing heavily in the same new equipment.
• 0:56
  Porter says the productivity gains were captured by customers and equipment
• 1:01
  suppliers, not kept as profit.
• 1:03
  I think about it with software.
• 1:04
  A tool comes out that saves everyone an hour a day, and a year later it's just table
• 1:09
  stakes.
• 1:10
  You didn't get ahead.
• 1:11
  You just avoided falling behind.
• 1:13
  That's exactly the distinction.
• 1:15
  Porter calls it operational effectiveness: doing similar activities better than your
• 1:19
  rivals.
• 1:20
  Faster, fewer defects, less waste.
• 1:22
  Strategy is different.
• 1:24
  Strategy means doing different activities, or doing similar activities in different
• 1:29
  ways.
• 1:29
  And he's careful here.
• 1:31
  Operational effectiveness is necessary, but it's not usually sufficient.
• 1:35
  Why not sufficient?
• 1:36
  If I'm genuinely faster than the shop down the road, that should count for
• 1:40
  something.
• 1:41
  It counts until they copy you.
• 1:42
  Best practices spread quickly, through competitors, through consultants,
• 1:46
  through software.
• 1:48
  Porter pictures a productivity frontier, which is the sum of all the best practices
• 1:52
  at a given moment.
• 1:53
  You can move toward it, but so can everyone else, and the frontier keeps moving
• 1:58
  outward.
• 1:59
  Then the second problem hits, which he calls competitive convergence.
• 2:03
  The more companies benchmark each other, the more they look alike.
• 2:06
  They end up racing down identical paths that no one can win.
• 2:10
  So the treadmill is real.
• 2:11
  Everyone runs faster and nobody moves.
• 2:14
  And the dangerous part is that it feels like progress.
• 2:17
  You're busy, you're modern, you're improving.
• 2:20
  But if customers can't tell you apart from the next option,
• 2:23
  the only lever left is price.
• 2:25
  So what does real strategy look like?
• 2:27
  Porter uses Southwest Airlines.
• 2:30
  Right.
• 2:31
  Southwest offered short haul, low cost, point to point service between midsize
• 2:35
  cities and secondary airports in big cities.
• 2:38
  Then everything else was tailored to that.
• 2:41
  Gate turnarounds of only 15 minutes, so planes fly more hours with fewer aircraft.
• 2:46
  No meals, no assigned seats, no premium classes.
• 2:50
  Automated ticketing at the gate, so customers bypass travel agents and Southwest
• 2:55
  avoids their commissions.
• 2:57
  One standardized fleet of Boeing 737s, which simplifies maintenance.
• 3:01
  Each choice makes the next one easier.
• 3:04
  No meals means faster turnarounds, and one plane type means simpler maintenance.
• 3:09
  It's a system, not a feature list.
• 3:11
  That's what Porter calls fit, and it's why Southwest is so hard to copy.
• 3:15
  You can imitate one tactic.
• 3:18
  Copying twenty interlocking choices means rebuilding your entire company.
• 3:23
  Which brings us to Continental.
• 3:25
  Their version was called Continental Lite, launched in 1993.
• 3:29
  Let me guess.
• 3:30
  They copied the visible parts.
• 3:32
  They did.
• 3:33
  They cut meals and first class, lowered fares, added departures,
• 3:37
  and shortened gate times.
• 3:39
  But they stayed a full service airline everywhere else.
• 3:42
  They kept the hub and spoke system, the mixed fleet, baggage transfers,
• 3:46
  assigned seats, and standard travel agent commissions.
• 3:49
  Per the University of Illinois course material built on Porter's work,
• 3:52
  Continental Lite could not afford to compete on price and still pay those
• 3:56
  commissions, but it couldn't do without agents for its full service business either.
• 4:01
  Planes were delayed at congested hubs and slowed by baggage transfers.
• 4:05
  Late flights and cancellations generated a thousand complaints a day.
• 4:09
  The airline lost hundreds of millions of dollars, and the CEO lost his job.
• 4:14
  That's called straddling, right?
• 4:15
  Trying to hold two positions at once.
• 4:17
  Yes, and Porter says trade-offs are the reason it fails.
• 4:21
  Reputation gets muddled.
• 4:22
  The activities themselves need different equipment, different skills,
• 4:26
  different systems.
• 4:27
  And leadership can't coordinate two contradictory priorities.
• 4:31
  So here's where it gets close to home.
• 4:33
  Picture a custom design build remodeler with expensive project managers and master
• 4:38
  carpenters.
• 4:39
  Business gets slow, so they say yes to 150 dollar emergency handyman jobs.
• 4:44
  Master craftsman hours on a small patch job wipe out the margin,
• 4:48
  and the delays frustrate the customer.
• 4:50
  Or a fine dining restaurant that adds third party delivery apps and discounted grab
• 4:55
  and go lunches.
• 4:56
  Now the kitchen is fielding courier tablet alerts during the dinner rush,
• 5:01
  dine in tickets slow down, and the food sits in cardboard.
• 5:05
  The atmosphere that justified the prices is gone.
• 5:08
  Same pattern for a cash pay dental practice that fills calendar gaps with low
• 5:13
  reimbursement insurance patients, or a tight tolerance prototype shop that takes
• 5:19
  mass stamping runs without the equipment for them.
• 5:22
  Porter points to growth pressure as the most dangerous driver.
• 5:26
  Every yes feels like revenue.
• 5:29
  Each one quietly erodes the position that earned you the premium.
• 5:33
  So what do people actually do about it?
• 5:36
  Start with an audit.
• 5:37
  Look at the bottom 20% of your customers or projects from the last 12 months,
• 5:43
  the ones with the most headaches, special exceptions, and thinnest margins.
• 5:48
  Don't ask what was wrong with them.
• 5:50
  Ask which specific incompatibilities made them a bad fit for your system.
• 5:55
  Then turn that into a short list.
• 5:57
  Three to five boundary rules your team can use immediately.
• 6:01
  A minimum project size, a lead time that isn't negotiable, no custom variations
• 6:07
  outside your standard assemblies.
• 6:09
  Your staff shouldn't need to ask the owner every time.
• 6:13
  And a quick fit check.
• 6:14
  Walk through intake, delivery, billing, and follow up, and ask whether each step
• 6:20
  reinforces the others or pulls in a different direction.
• 6:23
  That's your week.
• 6:25
  Audit the worst fits, write the no list, check the fit.
• 6:29
  The takeaway for me is that getting better isn't the same as being different.
• 6:33
  And a strategy is mostly a list of things you refuse to do.
• 6:37
  If you want help building a smarter, more resilient business through technology,
• 6:42
  marketing, websites, automation, or strategy, you can learn more at modularity.us.