EDGE STRATEGY A NEW MINDSET FOR PROFITABLE GROWTH Author: Alan Lewis and Dan Mckone Publisher: Harvard Business Review Press ISBN: 9781633690172 Price: Rs 995 Customization is the ultimate weapon against commoditization. If you can truly convince customers that the product they are buying is unique to them and built for them, then it becomes quite hard to compare it to a competitive equivalent. The ultimate form of this core strategy is bespoke, or custom-made. Literally, a product is produced from raw materials to the customer's exact specification; it is a one-of-a-kind. There is no prefabrication in this model; the manufacturing or production process occurs entirely after the order is secured. The immediate example of this is high-end tailoring: a customer has detailed measurements taken, and skilled tailors literally cut cloth from spools of fabric and sew them together to make a piece of clothing to the customer's exact measurements. There are many other examples; having a custom home built takes on a similar model, as does a major engineering project such as commissioning the construction of a new ship. In these cases, the customer specifies in advance everything he wants to see in the product and the supplier builds to that specification. In our circle diagrams in chapter 2, these would represent a perfect eclipse situation. The customer permission set is fully met, since the offer has been built specifically to do so. The trouble with this model is that you cannot use any scale efficiencies, and you need to have a highly skilled workforce to execute such customized production efforts. If you have ever explored tailored clothing providers, you might have discovered offerings of made-to-measure custom clothing. This apparel is marketed to offer you a more personalized product at much more affordable prices than it would cost for true bespoke. These companies rarely make your product from scratch, but rather have a broad range of templates. While they take measurements as a bespoke tailor does, their production solution is a modular one.
Essentially, they configure your product using a range of predetermined elements. The product you buy is indeed relatively made-to-order and has been configured to feel sartorial enough to satisfy all but the most discerning customers. They can offer it to you at a lower price because there are indeed some economies of scale, and this model requires less specialized labor than truly personalized tailoring. Similar modular solutions exist in home building and industrial products. In all cases, the companies are trying to use customization to avoid price comparison and the threat of commoditization. In much the same way, edge-based customization can be a faster and easier way to offer customization. It involves the active use of edge strategy to enable product configuration without having to make fundamental changes to how you produce your core offering. Identifying product edges to your core provides the building blocks so that a customer can customize his own offering along prioritized dimensions. Hotels are an interesting example of a service industry that is finding new ways to execute exactly this strategic move. Some hotel companies have realized that they must pursue a more sophisticated segmentation of guest needs and compete in a more "customized" way to prevent commoditization of their offerings. Today they are starting to use edge-based customization to compete. At a high level, there are four sets of actors in the hotel business: property owners, management companies, distribution partners, and the hotel brands themselves. Since many of the big hotel companies have gone "asset light" over the last couple of decades, the property owners are typically real estate investment trusts, wealthy individuals, or family funds. The owners are focused on identifying underserved locations, selecting valuable real estate, building attractive facilities, and striking deals with the other three actors. The management companies and distribution partners play important roles, but are largely middlemen taking direction, and fees, from either the property owners or the hotel brands. The hotel brands are the drivers of product innovation; they are focused on defining and managing brand standards, devising marketing messages, and improving the systems (computer reservations, loyalty programs, and so on) that pump customers into their networks. The traditional way to make money in the hotel industry has been to bet successfully on the right property, ensure consistent service delivery, and then ruthlessly manage costs to disciplined standards, while not overpaying for distribution. This formula ensures that a hotel is on the right side of the supply-demand equation through a full economic cycle.
Reprinted with permission of Harvard Business Review Press