Jack Trout's book title says it all, Differentiate or Die.
The title may seem overly dramatic to some, but in reality, death of a business might actually be welcome compared to the torture of presiding over a struggling business. These struggling business owners often face years of agonizing stress compounded by unreasonable work hours to merely keep the business alive. This can cause strain on family relations and can destroy any joy related to owning the business. It's like the debate over capital punishment, "Is the death penalty really harsher than life in prison?" For many contractors, the death of the business would actually be more humane.
The most successful businesses have both a winning strategy and are operationally efficient. Strategy is about what the business should be doing. Operational efficiency is about how to do it. I often ask my seminar attendees, "Is it better to do things right? Or is it better to do the right thing?" For those that think it's more important to do things right, consider the following: "Does it matter how well you do something that doesn't need to be done?" Of course, the goal is doing the right thing correctly, but to achieve this, contractors must start with the "right thing." Unfortunately, Michel Roberts, CEO of the consulting firm Decision Processes International, reports that most businesses only focus on operational issues.
Doing the "right thing" builds a defensible competitive advantage over your competitors. A defensible competitive advantage creates value for the client that your competitors can't duplicate. This is critical because unless a contractor provides added value, why should the client pay one nickel more?
Have you ever wondered why some contractors are more profitable, while others struggle? A typical answer is, "They are better managed." There's always room for operational improvement, but it's really difficult to create a significant performance gap in operations alone. Significant performance improvements occur when a business does something totally different-changing the "what."
Despite the evidence, there are those that still believe that customers only care about price. It is easy to understand how that perception is created, but it's not true. When I ask my seminar attendees to raise their hand if they think gasoline at $3 dollars a gallon is over-priced, a majority of the audience raises their hand. I then say, "Let me rephrase the question. How many of you are willing to walk twenty miles to save three dollars?" The hands go down. The first question focused on price while the second question focused on value. The reality is that the price is always too high, which is why differentiation focuses on value.
Tom Winninger in his book Price Wars reports that 17 percent of consumers only care about value-they want the best. Another 27 percent only care about price. This leave 56 percent in the middle-they will buy based on price or value. The problem is that unless the middle group understands the value, they default to price. This situation can lead to a flawed perception.
Most contractors never see the 17 percent of consumers that buy exclusively based on value because those clients are already committed to a particular contractor. Therefore, it appears these consumers don't exist. If you don't educate the middle group on the value and they therefore buy based on price, it appears that everyone buys based on price. When the middle group recognizes the value, they are certainly inclined to buy based on value. Combining the middle group with the top 17 percent forms a group of about 73 percent of consumers that buy based on value-quite a contrast to the previous perception of zero.
It doesn't matter whether you bid work or negotiate work, you can still improve your profit margins by differentiating your company. Obviously, negotiated work offers greater flexibility and more options, but this doesn't mean the hard bid contractor can't find ways to differentiate his company from the competition.
For example, hard bid contracts tend to be confrontational. This is due to the fact that margins are too small, so people are afraid to give an inch. However, contractors can differentiate themselves by avoiding confrontation and working with the customer. Larry Casey, corporate senior vice president for Skanska USA, refers to this as "behavioral differentiation." This is something the contractor can do at very little cost, yet the benefits of eliminating confrontation can be significant.
Contractors have found clients more willing to work with them when there is less confrontation. This turns into increased profits for the contractor. When the contractor develops a strong relationship with a client, the contractor doesn't have to spend dollars fighting over issues and requests get processed faster and easier resulting in additional savings. A road builder in Delaware illustrates the potential savings. When this contractor bid a project, they found that they had bid too low after they were awarded the contract. The president of the company told his people to meet with the municipality and work with them to speed up the process so that they could earn the early completion bonus or they would lose money on the project. They did this. The surprise was, the contractor actually made money before they received the early completion bonus.
Even if your company is providing a commodity, you can differentiate your company from the competition. The Granite Rock Company of Watsonville, CA, sells rock and sand to local contractors. It's virtually impossible to differentiate in the rock and sand business. However, in the area of service, Granite Rock Company stood out from its competition.
The cost of a truck and driver to pick up the sand can cost as much as a dollar or more per minute. Therefore, it's critical that trucks are loaded quickly to avoid long lines of trucks waiting to be filled. In response to this challenge, Granite Rock created its Granite Xpress system. They furnish the buyers of their rock and sand an identification card similar to an ATM card. The driver pulls up and inserts his identification card, which releases the material and prints a receipt. This process has reduced the loading time from twenty-four minutes to only seven minutes-saving the buyer $17 or more per load in trucking costs. After creating this savings, do you think that Granite Rock must sell their materials at rock bottom prices?
The various delivery methods provide different opportunities for the contractor. It's obvious that the negotiated market offers the greatest opportunity for the contractor to differentiate itself. The reason is because the entire process is negotiable, and this allows the contractor to offer different services, instead of merely responding to specific bid documents. This allows the contractor to match its unique services to customers that place high value on those services. This results in higher profit margins for the contractor and a happier client.
One of the most powerful ways for a contractor to differentiate itself from its competition is to master a niche market. While there may be other contractors in that niche, the fact that a contractor is considered an expert usually results in higher fees. For example, a general contractor in New Jersey concentrates on building restaurants. This is a very specialized industry with very specific demands. The restaurant owners understand this and typically will only work with contractors that specialize in restaurants. The restaurant owners are willing to pay a premium because they realize these contractors deliver the finished product faster, with higher quality and less hassle for them. Since the specialized contractors save the owners money outside of the construction costs, they don't mind sharing some of that savings with the contractors in the form of higher fees.
There are three basic areas a contractor can differentiate itself from its competition: the product, service and relationships. Since the contractor buys the materials from a third party, all the contractors will deliver the same materials, therefore there is very little room for differentiation in the materials. There can be some differences in the installation, but overall, the opportunities for a contractor to differentiate in the product area, is limited.
In the area of service the doors begin to open. Services include offering alternative products because of expertise or faster delivery as in the case of Granite Rock. In essence, the contractor's options are almost limitless. It just takes a contractor to examine its strengths and combine them with innovation to increase the value provided to clients.
However, the greatest differentiation is offered through relationship development. Here the contractor builds trust and credibility. The result is a client that has more confidence and greater trust in the contractor. The result is less risk for the client. In bid work a behavioral differentiation can make the process run smoother and therefore reduces expenses. Again, the relation is built on greater trust; the roadblocks or barriers on the project are removed.
Rather than struggle in your business, working overtime just to keep the company alive, take the time to determine how your business does, and can, differentiate from your competitors. Then, educate and sell your prospective clients on the value you'll deliver to them.
Construction Business Owner, April 2006
