Scale and Intimacy in Business strategy
In this blog, we shall discuss about the business strategy and why the successful firms of the future should possess both the scale and differentiation advantage to be leaders in their respective businesses.
Historically, companies competed in two ways – They would either be cost leaders usually through scale or have a differentiation advantage by building deep and intimate customer relationships.
How legacy companies operated their business strategy
- Historically the strategy followed by companies was that as they become large in size, their strategy turned towards low cost scale driven option.
- In order to measure their success towards this strategy, frameworks like Experience curves, Relative market share and relative cost metrics were used.Companies like General Electric and Texas Instruments generated maximum value to their shareholders using this strategy.
- This strategy though provided profits to company had a major drawback.As the company grew bigger and scaled up, intimacy towards customers went down.This resulted in an inverse relationship between Scale and Intimacy.Larger the companies became, there was more possibility of customers developing a dislike/hatred towards them.
- The net promoter scores of Scale leaders globally across industries have negative scores.This disconnect from the customers has become a huge liability to the legacy scale leaders.
Era of Scale Insurgency in business strategy
- Successful companies are offering customers the benefits of both scale and intimacy.These are the companies that use latest technologies and digital business models to create this differentiation.
- Take the instance of Netflix which is a market leader in the streaming market.At the same time it has higher Net Promoter Score than its major competitors.The same instance applies to other market leaders like Apple, Vanguard and Salesforce.
- These market leaders are using emerging technologies like Cloud, AI and Machine learning to generate the benefits of leadership economics and at the same time better understand what their customers want to personalize their offerings accordingly.
- Scale insurgents are innovators but what really sets them apart is their ability to build Go to Market models that create economic advantage at Gross Margin and at the level of Operating Margin.These companies control 80% of the profits in most markets and will continue their path to Profit leadership in future.
How Scale Insurgents build Scale in business strategy
- The scale insurgents builds scale differently when compared to legacy companies.In the digital era, Scale extends beyond physical to digital and data assets.
- The latest technologies helps companies achieve superior economics and at the same time provide intimacy and personalized services to customers.
- For instance, the amount of data that Amazon collects from its customers and how it translates those data to insights and personalized offerings to customers is well known.Other companies like Google and Tencent follow the same principle.
Case Studies of Scale Insurgents in business strategy
- Peloton – A new age fitness studio is a classic instance of scale Insurgents where the firm has taken the intimacy of the exercise bike studio with the dozen of students with their trainer recording their fitness sessions in a studio and make that experience available to other riders across the world at their demands.The company has grown to $800 million in revenues with one million members and thousands of archived videos.
- Discovery Group in South Africa is another case study for a Scale Insurgent.The insurance company tracks customer behaviour and rewards them for their healthy choices. The success of the company lies in its strong data analytics capabilities which enables better underwriting decisions and deeper customer engagement. Discovery is able to expand internationally to other markets and have partnered with regional companies to tap new customers.As a result, the company has the highest valuation multiples in the industry.
Challenges faced by companies
- Most companies struggle to balance scale and intimacy because they succumb to the growth paradox which is that with growth comes complexity and complexity kills growth.
- As company scales up, they add products and services to meet new demand. They add layers of management and the matrix starts to take over.This results in bureaucracy and processes are created to manage scale.This has an impact on the Customer Intimacy which suffers because the voice of the customer dies in the bureaucratic processes.
- This leads to poor execution, customer confusion and inability to offer a compelling value proposition.
- Companies need to build both scale and intimacy in their business strategy to be successful in this digital age.When companies scale up, customer intimacy takes a backseat as they get lost in the quagmire of internal bureaucracy and processes.
- Successful companies in the digital era are innovative, entrepreneurial and offers solutions that are scalable and at the same time delights its customers.
- Such companies not only build the most intimate relationships with customers, but also create the highest level of employee advocacy.