Positioning Your Firm Isn't Logical

Positioning a professional services firm isn’t logical. If anything, defining a differentiating value proposition for your firm will take you in the opposite direction of “common sense.”

As business planners, we routinely make the mistake of believing that the path to growth and profitability is through diversification. The internal reasoning goes something like this:

Last year we offered 15 core services; this year let’s increase it to 20. That way, we’ll offer more variety to our current customers, plus we’ll attract new customers by offering new services. Besides, our competitors are adding these services and we can’t afford to fall behind. Plus, our customers have additional needs that we could probably fulfill. If we keep expanding, maybe we’ll have a chance at being their one-stop-shop. They won’t have a reason to go anywhere else.

Sounds reasonable. Isn’t diversification what companies do in order to grow? Unfortunately, business strategy is not common sense. In fact, effective strategy-making means going against many of the aspects of our human nature.

The urge to copy

Our instincts tell us that if a particular approach appears to work for someone else, it would make sense to copy it. Anthropologists tell us that the tendency to copy actually runs deep in our DNA, since copying the successful behaviors of other ancient humans was a useful survival mechanism.

But efficacious business strategies are those that actively avoid copying the products, services, and approaches of competitors. To replicate your competitors’ business models isn’t a strategy, it's karaoke. This means we must go against our natural and deep-rooted instinct to copy. This dynamic is what makes most organizations so strategically weak; they cannot or will not overcome this fundamental part of their human nature.

Next, logic would suggest that if you want to sell more, offer more. A store with 1,000 or 10,000 items will earn more revenue than a store selling just 100 items, right? While this seems a sensible assumption, an increase in the number of products rarely if ever produces a corresponding increase in revenue. And when it comes to profit, diversification is actually negatively correlated. In fact, Wall Street analysts actually attach a “diversification discount” to companies with broad product lines, discounting the stock by as much as 12%, because they know that generally the more diversified the company, the less profitable it is.

One-stop shopping?

What about expanding the organization’s offerings in an attempt to fulfill all major customer needs in the category – a single-source solution? Isn’t that a reasonable expectation? Perhaps in simpler times, when there were many fewer providers and access to goods and services was limited. But in today’s world of the long tail, buyers can pick and choose from best-in-class solutions to their problems without having to settle for an “enterprise” solution that attempts to be good at everything and ends up being average in everything.

The founders and developers of Basecamp, the highly successful workflow management software, preach that strategy means being willing to let your customers outgrow you. They argue that no company can continually meet all the needs of customers as they progress through their life cycle and that if you attempt to do so, you’ll end up offering a lot of mediocre products and services rather than having a limited number of offerings in which you’re a world-class choice. The executives at Basecamp know that eventually some of their customers will outgrow them and move on to different solutions, and they feel just fine about being known as one of the world’s best solutions for small-to-midsize companies. If they tried to modify their product to appeal to companies of all sizes, they would surely lose that position.

The most successful brands deliberately cultivate a narrow line. They know that depth is much more effective strategy than breadth. This is particularly true in professional services, where your product is your intellectual capital. Being afraid of “too much focus” is the mistake of assuming narrow is the same thing as small. Starbucks is narrow – coffee – but it certainly isn’t small.

The perils of line extension

Logic suggests another growth strategy: diversifying and creating other divisions will help grow your firm in these economically challenging times. Even if this sometimes helps add to your revenues, it rarely adds to your profit. This is mostly due to the diffusion of your firm’s energy and resources. Your firm and your management team can really only optimize one strategy at a time. The so-called “two-pronged strategy” is simply a manifestation of your firm’s inability or willingness to name what you stand for.

To make matters worse, firms that do choose to establish additional divisions tend to make the same mistake their clients make; they extend the existing brand name onto these new companies. Logic says this will create faster, higher awareness at a lower cost. But marketing textbooks are littered with examples of line extensions that literally destroy the meaning and value of a brand. In professional services as well as packaged goods, line extensions rarely, if ever, result in a strong brand that generates profits without cannibalizing the parent brand. Again, this is because your brand can really only stand for one thing at a time.

The main reason so many brands -- professional firms and others -- struggle to succeed is because they do what seems logical instead of what’s actually effective.