Tag Archives: strategy

Better before Cheaper

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The last post highlighted an HBR article that mentioned that for companies which wanted to become truly great – to grow and sustain over long periods of time – it was essential to focus on revenues first and costs second. The same article mentions another key factor underlying the greatness of companies: focus on “better before cheaper.”

Better before cheaper means these companies concentrate their energies on coming up with a good product and selling it to their customers much more than they focus on coming up with a cheap product. Yes, there could be market situations where a cheaper product sells much more than a slightly pricier one. But if the price advantage comes at the expense of product quality, then it is unlikely to provide sustained benefits.

One of the classic examples that comes to mind is that of Apple which charges a premium for its products, and, despite this, has cultivated a herd of followers! Had Apple focused on lowering its costs or coming up with cheap products, it would have been just another brand, fading into the background as soon as it came into the limelight.

A possible example for the other extreme could be the Mahindra Stallio where product quality suffered when the company tried to focus on lowering costs. Despite good marketing (see a clutter-breaking TVC here featuring movie actor Aamir Khan) the product had to be withdrawn from the market. Mahindra is, nevertheless, back with a new bike, the Centuro, and it remains to be seen where this product is headed.

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Revenue before Cost

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A Harvard Business Review article by Michael E. Raynor and Mumtaz Ahmed titled ‘Three Rules for Making a Company Truly Great‘ suggests that companies that are truly exceptional (which have done well over a long period of time) prioritise revenue over cost. They call this as the rule of “revenue before cost.”

Revenue before cost means that these companies focus on the topline rather than on the bottomline. This is not to say that they don’t try to minimise costs. They do that as much as or better than their peers. But they make sure that they pay enough attention to revenue generators. In effect, they focus on capitalising on tomorrow’s opportunities rather than on solving today’s problems, which is something companies are increasingly realising as important.

For a typical manufacturing company, “revenue before cost” might mean spending more on a specific sales force who bring in new customers, rather than on a new machine that reduces manufacturing cost of parts. However, some online sales companies seem to take this principle too far when they focus on sales even as sales-returns and related costs mount.

Indeed, like any business principle, “revenue before cost” will be an effective strategy only if it is implemented well.

Prepare for the Best

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We are often told to “hope for the best, prepare for the worst,” and the advice seems well-founded. After all, who wouldn’t want to survive through the worst of circumstances?

But preparing for the worst makes your company capable of exactly that – responding perfectly when the worst possible situation comes. The arsenal is all ready for when your most important competitor starts a price war, so is it when your customers don’t adopt your new product. But what if the same competitor shifts focus to a different market segment, or your new product is adopted surprisingly well by the market? Having the options in place to quickly increase production will then allow you to capture the market. At the very least, having a way of noticing such an opportunity will let you take advantage of the next one when it arises.

Sun Tzu says in The Art of War: “Be conscious of possible disadvantages that can arise when you are in a favorable position. Also be prepared for possible advantages that can arise even when you are in the midst of misfortune.”