The Discipline of Market Leaders

In 1995, Michael Treacy and Fred Wiersema wrote their best selling book "The Discipline of Market Leaders".  The basic, but powerful, premise behind the book was companies needed to pick their customers and market focus depending on one of 3 disciplines they excelled at - customer intimacy (like a Nordstrom), product leadership (like a Sony) or operational excellence (like a Wal-Mart).

A decade later, given the dominance of Wal-Mart, Southwest Airlines, the Chinese in many manufacturing markets, the Indian service providers with their GDM model I believe we have moved to a world where being operationally excellent is a price of entry. On top of that you can garner a reasonable premium - no more than 15 to 25% - if you truly are customer intimate or a product innovator. You can do somewhat better if you do not seek high volumes or market share - like McKinsey, Four Seasons, Neiman Marcus or even Starbucks but each of them has less than 1% of their respective services, hotel, retail and restaurant industries.

Price leadership is being set from the bottom of the market and consumers increasingly do not tolerate huge premiums. Home Depot and Target are doing ok, but cannot get way out of line from Wal-Mart. Every major US airline has to track with Southwest. It is interesting to see major US airlines try to escape from Southwest and chase previous margins in the international market. Wait till they hit Singapore Airlines or BA's efficiencies.

I see so many technology vendors talk about "value selling" and hiring consultants who promise to teach them about continued high margins. Get real. If you are HP, remanufactured cartridges are the new benchmark. If you are Sun, it is Linux servers. If you are Oracle or SAP, it is third party maintenance firms for support pricing. If you are Siebel, it is SaaS pricing. If you are Accenture or IBM, it is Wipro pricing. That plus a max of 20 to 25% - if you can show some unique customer intimacy or product leadership.

We can fret about China taking over global leadership of various high tech and mobile hardware categories. The assault on software, services, telecomm is next. If not the Chinese, it will be Wal-Mart like entities. Most tech leaders want 50, 70, 90% margins. In the new world, that is not the discipline expected of market leaders. It is indiscipline that attracts a new breed of disciplined players.