Doesn’t it sometimes feel like everything is new every 15 minutes? Just when you think you’ve got a handle on blogging, here comes microblogging and Twitter. And just when you think you’re getting the hang of this tweeting thing, here comes blip.fm and foursquare.
While you’re wondering how foursquare is going to help you sell more houses, whoa, here comes the Apple iPad and the future of mobile and … in all likelihood, mind-reading technology is just around the corner.
It’s easy to get overwhelmed in the rush of the "New." In those moments, it might help to go back to the classics.
One such classic is the work of Michael Porter, an academic and corporate adviser (he is one of the founders of the Monitor consulting firm), who is often called the father of modern strategy. While he’s written 18 books and numerous academic articles, some of his core insights can be gleaned from this article from Harvard Business Review: "What is strategy?"
Given that my day job is providing strategic consulting to organizations, I’ve been reviewing Porter’s works, and there are numerous avenues for thoughts. I present one such here: How should real estate brokerage companies compete?
General strategies of competition
According to Porter’s work, there are three general strategies for competition: cost leadership, differentiation, and focus (which is in turn divided between cost focus and differentiation focus).
Cost leadership is pretty much what it sounds like: a company will become the lowest-cost provider of goods or services in the industry. As long as the company can charge around the prevailing prices in the market, cost leadership will result in good profits. Dell is an example of a company that has established cost leadership.
Differentiation means that a company will compete on some unique value proposition rather than on price. As long as the company can charge a premium that justifies the additional expenses required to differentiate, it will outperform the competition. Apple is an example of a company that competes on the basis of differentiation.
The two are actually linked, as Porter points out that cost leadership requires that the product or service is at least close to the offerings of the competitors, while differentiation requires that the cost of the product isn’t way out of line with prevailing costs.
Focus means that a company will target only a segment of the overall market, either by being cheaper than competitors in that segment or by having a unique value proposition to that specific segment.
Digital video camera-maker Flip is an example of a company deploying cost-focus strategy (Flip targets only the most casual of videographers), while high-end computer hardware company Alienware is an example of a company deploying a differentiation focus strategy (Alienware targets only hardcore computer gamers).
Of course, the full explanation of the general strategies of competition would require a book, as one would need to understand the industry itself and the structure of the industry. But a few observations must be made.
First, Porter defines competitive advantage as sustaining higher profits than the industry average. Competitive advantage is not necessarily about revenues, nor is it about being the lowest-cost provider: it’s about profits.
Competitive advantage also means being able to sustain those above-average profits over time: a short-term spike because of a hit product (e.g., Cabbage Patch Kids, anyone?) or an unusual windfall is not competitive advantage. …CONTINUED
Second, a firm cannot be both the lowest-cost provider and a differentiator except in certain circumstances — basically, when everyone else is bad at doing their job. Normally, a company has to choose between the strategies and make tradeoffs.
For example, a cost leadership strategy might mean spending less on design, packaging and marketing — all things that a differentiation strategy requires in order to be effective. The same company usually cannot focus on a segment of the market, but then also be a cost leader to the rest of the market.
Keep these two thoughts in mind.
Competition in real estate
The real estate industry boasts some of the fiercest competition around. Even the most established brokerages and agents have to fend off competition constantly.
But a basic analysis of the industry is difficult, as it isn’t clear who the "buyer" is when dealing with a brokerage situation: Is it the seller who lists a home, or the buyer who buys it, or is it both?
And the transaction is so fraught with emotion and infused with personality that it is difficult to think of what constitutes a sustainable competitive advantage.
I struggled with this issue for years, until I shifted my thinking a wee bit. I’ve been looking at things from the consumer’s point of view and from the Realtor’s point of view. Turns out, the proper point of view is that of the brokerage.
With a few exceptions (such as Redfin), the vast majority of brokerages today are not really in the brokerage business. They are in the agent-servicing business. Their customers aren’t the sellers and buyers of real estate, but the real estate agents (except in legal theory).
The agents are not a labor force that brokers pay only upon a closed transaction — they are the buyers of brokerage services who pay when they make money. Once one starts to evaluate the problem through this lens, all sorts of things fall into place.
First, the classic five forces analysis of the industry becomes possible. There is hardly any barrier to entry, as a broker’s license is easy to get and there are no real capital investments required. Buyer power (agents) is exceedingly high, as they can choose from a wide variety of suppliers (brokerages) or just enter the market themselves by getting a broker’s license.
Supplier power is immense, as the only true supply a brokerage needs is the license to be a broker, and that is supplied by government agencies, the National Association of Realtors and the local multiple listing service.
The threat of substitutes is low because government regulation mandates that the buyer (the agent) work for a properly licensed broker, but the barely existing barrier to entry makes this a moot point.
And rivalry between the firms is incredibly strong in most markets, since many brokerages are driven by ego and personality rather than by pure profit motive.
Second, it becomes quickly apparent that most brokerages have no real strategy for competing. They are neither seeking to be cost leaders nor are they seeking differentiation. Very few indeed seek focus of either variety, as segmentation of the agent population is an unfamiliar term to them. …CONTINUED
Almost all brokerages do the exact same thing that every competing brokerage does, in roughly the same way, with predictable results: stagnation.
The few that have started to think strategically about competition are seeing real success in the trenches. Many are as yet unknown, because the industry is fully mature and yet driven by technological change.
But they are growing, and will have sustainable competitive advantage if they can stick to their strategy and execute it well.
Competitive advantage is the entire system
Because of the nature of competition in real estate, there is a widespread perception that the be-all, end-all of competitive advantage is the brand. Personal brand and reputation of the agent, and the brand and reputation of the brokerage, are topics that bring out a fair amount of obsession in real estate.
But real competitive advantage is not the brand; it is not the reputation. Good branding forms an element of competitive advantage, but real competitive advantage arises from the entire system built around a strategy of competition.
Cost leaders build a system that fits together to deliver a systemic advantage in cost, such that they make above-average profits while charging the same price to their agent customers.
Differentiators build an entire system that works together to deliver a unique value proposition for which they are able to charge a premium that their agent customers are happy to pay.
Focus competitors don’t simply target a segment; they build all of their activities around the strategy of cost focus or differentiation focus, and deliver either cost savings or unique value to the target agent customer.
Competitive advantage is not technology, although technology often provides a significant element of competitive advantage. The same technology can hurt a differentiator even as it helps a cost leader, if no thought is given to just how that technology fits into the overall competitive strategy.
Competitive advantage certainly is not a bunch of statements about how great your agents are, or how professional and ethical you are, or how much you care about the consumer.
Those be mere words — promises that the entire system of the brokerage, built around a competitive strategy, either delivers on or fails to deliver on.
In short, competitive advantage is everything that the brokerage does: the entire system.
Robert Hahn is managing partner of 7DS Associates, a marketing, technology and strategy consultancy focusing on the real estate industry. He is also founder of The Notorious R.O.B. blog. You can reach him on Twitter at @robhahn.
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