So I promised earlier, that I would talk about Northern European companies and what they do particularly well in the area of strategy. And it traces back to what we've just been talking about with differentiation strategies. In particular, how companies in Northern Europe make use of intangibles and aesthetics. When they attempt to differentiate their products and services.

Now there's a nice quote from Daniel Pink who is a book author and an interesting spokesperson on a number of topics. He says, that for businesses, it's no longer enough to create a product that's reasonably priced and adequately functional.

Anybody can do that. Today, it must also be beautiful, unique and meaningful. That's why people buy Michael Graves toilet brushes, Karim Rashid trash cans, and Philippe Starck flyswatters. In an age of abundance, appealing simply to rational, logical and functional needs is insufficient. In terms of the differentiation strategy value proposition that we talked about before, where companies say to their customers, buy mine. I realize that it costs more, but it's better. It's worth the extra money. What's interesting in the story is what better means for companies like this. It means not only does it work better, it means also that it's cooler, or that it's more elegant, or that it's more beautiful. So let's take an example, you maybe one that you remember. You remember Vipp. Vipp is a company that makes very high-end trashbins and toilet brushes and many other products as well. But these are their iconic items. Vipp says to its customers, buy my trash bin or toilet brush, it costs more, but it's better. And by better, I mean it's fun, it's beautiful, it's cool, there's an interesting story about it. It's in a famous art museum, the Museum of Modern Art in New York City. And oh, by the way, it also functions pretty well as a trash bin or a toilet brush. But that's not really why you're buying it.

So what's the difference if we take the story seriously between competition in a pre-globalized world and competition in a postglobalized world? Well, in the pre-globalized world, we sold and bought products, physical products. I used to work for a car company, the Ford Motor Company. A car is something you can walk over and tap your knuckles on. It is something that moves you from one point to another. It is a tangible object. It is a physically functional object that you buy for it's functionality. It also though, has what you might call an intangible component. And you can see this in the advertising for products like cars. If you look at a magazine, at a glossy advertisement for a Ford car, you might encounter the suggestion that if you drive this car, you'll be cooler. Or people will think you're more affluent or maybe you'll attract more members of the opposite sex to drive with you in your car.

Well, that intangible meaningful part though in the pre-industrialized economy was something that we kinda put on later. We made the car, we used processes and principles to make the car. Those were processes and principles that we call product development, we call operations, we call manufacturing. Those were a big deal in companies like Ford and are a big deal in companies like Ford. Each of those activities takes place in a different organization and a different building.

Once we were pretty sure we could make a pretty good car, we'd throw the idea over to other departments in other buildings called marketing, called PR, called sales. And those guys would put that intangible part on top, but it was an after part. It was something that we added on after the fact, like butter spread onto bread. So the tangible object was the main thing that we were selling. One of the things that went along with that story is typically the profit margins for these tangible objects was a relatively small percentage, say 20 to 30% of the overall price. So we were selling a tangible object and in return we were getting a modest profit margin on the order of 20% to 30%. In fact, many companies often used a rough heuristic that said let's take what it cost us to make the tangible object and to add a markup of maybe 25%.

Well, how has that changed in the postglobalized world? How does competition of the nature of Vipp, the trash bin company go? Well, obviously very big difference in terms of the profit margin. We reckon that a Vipp trash bin could probably be manufactured for less than $50 per unit. But it sells for about $500 or in some markets 500 euros per unit. That's a very much larger unit profit margin.

Why would people pay that much for a trash bin or a toilet brush? Well, there's really no way you can justify it purely in terms of functionality. So you have to ask the question. What is it exactly that people are buying when they buy a Vipp trash bin, or an object like a Vipp trash bin, or a toilet brush. Well, it has to be more than a physical object. They might be buying something to show their neighbors, what good taste they have. They might be buying into the very romantic story of where the Vipp trash bin comes from. They might be buying into the fact that the Vipp trash bin is in a major collection of a major art museum and they like to have items around their homes. They might be buying a piece of their own identity. I'm the kind of person who owns items like this. In which case, they're not speaking to their neighbors, not trying to impress anyone else. They're actually speaking to themselves. They're saying to themselves something about who they are as a person as they buy this.

Well, here too, we have principles, practices, processes, but one of the things that's very notable in this situation. Is that although we do spend time and effort on the practical side of things, on the product development on the manufacturing. An even bigger deal is how we influence the meaning of the product and in fact, what happens is the intangible part of the project are the product becomes the much bigger deal. We're not necessarily buying just a physical object, we're buying an idea, we're buying an interpretation, we're buying something meaningful.

So let's notice some things about the Vipp example. A 500 Euro trash bin is about as far as you can get from a cost leadership strategy. It's an extreme form of a differentiation strategy.

Let's notice too, this is kind of remarkable. This is a product category, trash bins, toilet brushes, yet we've historically valued pretty much only for how well they function. But here, somehow, in a very interesting strategic and also marketing twist. This company has figured out how to make you care if your trash bin or toilet brush is meaningful to you. That's a pretty interesting trick. And remember, it goes along with huge unit product margins.

If you can do this with a trash bin. What can't you do it with? You can probably do it with just about anything if you can get people to think a toilet brush is meaningful. Well, the world is full of things that you can receive this kind of differentation treatment.

It's also interesting to notice that the physical object, the iconic trash bin that Vipp sells looks very much like the trash bin as it was created for the first time in 1939. The question arises, where is the innovation? This is supposed to be a highly innovative company. Where is the innovation?

Well, the innovation is not in the tangible part of the product; it's in the intangible. This is a company that's constantly innovating the meaning of its product. Not the physicality of it, but what it means to people who encounter it.

That's a very interesting 21st century strategy. I won't even call it a trick because it's real substantive business knowledge applied. It's not a cheap trick.

Okay, so that's the 21st century Northern European differentiation strategy. Just a sample of it. Wanna turn now briefly to another reality that goes hand in hand with this one. It's often been called Hypercompetition.

Now the basic idea here is that, as we recall, Michael Porter cares a great deal about the sustainability of competitive advantage. It's not really strategy if it doesn't provide a sustainable competitive advantage. There's another idea out there now though, that kind of goes with the ideas from 21st century Northern Europe we've been talking about. And this idea is traceable to D'Aveni, although the idea is arguably much older. Maybe you can even trace it as far back as Schumpeter. The idea is that in a globalized fast changing world, the idea of sustainable advantage is quaint, it's obsolete, it's outmodded. So to the extent that strategic thinking depends on sustainability of advantage, it too is obsolete, at least in many fast-moving industries. This may not be true in every industry, but D'Aveni argues that it is true in some fast-moving industries.

So what should we do if this is the case? Well, strategy making becomes something other than what Michael Porter says it is. Managers have to accept the reality that all advantages erode and probably very quickly. More and more quickly in the modern era. And therefore, they have to focus on acquiring and maintaining capabilities for continuous disruption of their own and other firms business strategies. They have to develop a rapid succession of temporary advantages and never ending succession of temporary advantages. So what's the general advice that gets generated from the theory of Hypercompetition.

Well, it says that efforts to seek sustainable advantage are misplaced.

It says that it's better to seek an unending series of temporary advantages than to try for sustainable advantage. This perspective generates advice with velocity as a common thread. In perceiving the needs of the stakeholder, moving to new competitive positions, rearranging the terms of competition, changing the rules of the game and so on.

The dynamic of transient competitive advantage is what D'Aveni calls strategic maneuvering.

So we're gonna stop here and in the next lesson, I'm going to return to raise a few questions that the last few lessons point us towards. So we'll be right back.

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