I just came across this fantastic article:
Best Practice Doesn't Equal Best Strategy: Benchmarking is an important way to improve operational efficiency, but is not a tool for strategic decision making. When competitors all try to play exactly the same game, declining margins are bound to follow.Best practice. It may be the most readily recognized and widely used of all business management tools. And why shouldn't it be? To executives, modeling a company's performance on its best-in-class competitor is an ambitious but attainable aspiration. To investors, the strategy is a guarantee of the soundness of any company that embraces it. And to consultants, it is the tide that lifts every client's boat.
So why is it killing your margins? Everyone who follows business has seen the fat margins of growing young companies attract scores of new entrants, which eventually crowd the field and drive those very margins down. Why would top executives convert this regrettable fact of business life into a creed, especially when doing so simply hastens the endgame for everyone—first mover and Johnny-come-lately alike?
They act as they do because they don't understand that benchmarking is simply an operational tool. Instead, they all want to occupy the point on the strategic landscape that their most successful competitor has staked out. (See Eric D. Beinhocker, "On the Origin of Strategies", The McKinsey Quarterly, 1999 Number 4, pp. 38-45.) Soon other competitors can be seen herding, lemminglike, around that best-practice company's product, pricing, and channel strategies. Products and services become increasingly commoditized, and margins tumble as more and more incumbent companies compete for smaller and smaller segments of customers and industry resources.
That is just the begining of this fantastic article that ran in the February issue of CFO Magazine (It originally appeared in The McKinsey Quarterly, 2000 Number 2).
This seems like the perfect analytical accompaniment to Purple Cow. Just a thought...
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